INSURANCE CODE

The California Insurance Code (CIC) consists of statutes written and passed
by the state legislature. The governor signs these statutes into law. The insurance
code is changed by the legislature passing a new statute that amends or repeals
an existing statute. The code originally consisted of six divisions, but two divisions
have been repealed. The remaining four divisions are (1) general rules governing
insurance, (2) classes of insurance, (3) the insurance commissioner, and (4)
insurance adjusters. Each division is further broken down into parts, chapters, and
articles.

The Insurance Commissioner is elected by the people to serve a four-year

term in the same general election in which the governor is elected. If a vacancy
should occur during the term of the office, the governor shall appoint a replacement
subject to approval by the legislature. (CIC 12900) The commissioner shall
perform all duties imposed upon him by provisions of the insurance code and other
laws regulating the business of insurance in this State, and he shall enforce the
execution of such provisions and laws. (CIC 12921)

The California Code of Regulations (CCR) is made up of rules issued by the

commissioner. The regulations may be changed or withdrawn by the
commissioner. The CCRs are needed in order to administer the code. Although
the commissioner does not write the code, he is responsible for enforcing the code.
Even though the CCRs are not law, they carry the same weight as law. A person
who violates a regulation is subject to the same penalty as someone who violates
the code.

An insurance professional should have knowledge of the California

Insurance Code and the Code of Regulations. These documents identify many
unethical and illegal practices. However, they are not a complete guide to ethical
behavior.

CLASSES OF INSURANCE

Insurance in California is divided into the following 20 categories:

1. Life – Life includes annuities.

2. Fire – Fire includes homeowners, commercial property, and dwelling

policies.

3. Marine – Marine includes both inland and ocean marine

4. Title – Protects owner of loss if problems relating to possession of

property occur.

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 5. Surety – Guarantee of payment of one party for the fulfillment of an
obligation of a second party; a bond.

6. Disability (includes all forms of health insurance and disability

income) – Coverage of the event of illness, injury, or death, for those
who are unable to work.

7. Plate glass – Coverage of the breaking of glass, frames, lettering, etc.

8. Liability – Protects against loss where policy holder is responsible for

injury or malpractice to person or property.

9. Workers compensation – Payment of compensation to those injured

or sick while under employment.

10. Common carrier liability - Insures against loss while property is in the
care of a common carrier.

11. Boiler and machinery - Protection against injury or damages to person

or property caused from the explosion or breakdown of a boiler or other
machinery.

12. Burglary – Covers property of loss or damage occurring from theft or

burglary.

13. Credit – Insurance for losses against the repayment of loans. Can also
cover the risk of payment in the delivery of belongings.

14. Sprinkler – Coverage of liability or damages to person or property

occurring through the malfunction, leaks or breaks, of sprinklers, water
pipes or pumps, or other devices in place to extinguish fires

15. Team and vehicle – Protection against liability or damages caused by

teams (horse drawn vehicles), or vehicles other than ships or boats.
This does cover Trucker Insurance.

16. Automobile – Covers the policy holder of the dangers that occur in the
operation or use of the maintenance of the vehicle. Protects against
liability or damages of the vehicle or its parts.

17. Mortgage – Insurance that assures the mortgage lender that the amount
owed to the lender will be paid.

18. Aircraft - Coverage of the operation, maintenance, and ownership of

an aircraft. This does not include any coverage of damages or injury of
a person or property because of an accidents.

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 19. Mortgage guaranty (includes insolvency insurance and legal
insurance) – If the insurance company providing coverage goes
insolvent, this still guarantees payment to the lender.

20. Miscellaneous – Coverage against loss occurring through earthquake,

tornado, etc.

Prior to a discussion of the code, certain terms should be understood. These

include:

Shall: Shall is mandatory. There is no choice.

May: May is permissive. There is a choice to do or not to do something.
(CIC 16)

DEFINITIONS

Insurance: Insurance is a contract whereby one undertakes to indemnify another

against loss, damage, or liability arising from a contingent of unknown event. (CIC
22) In insurance the risk of loss is transferred to the insurer by the policyholder.
There are many risks that may be insured as noted by the number of lines of
insurance recognized by the California Department of Insurance.

Insurable events: Any contingent or unknown event, whether past or future,

which may damage a person having an insurable interest, or create a liability
against him, may be insured against. (CIC 250) In life or disability insurance,
insurable interest shall be required to exist at the time the contract of life or
disability interest becomes effective, but it need not exist at the time the loss
occurs. (CIC 10110) In property and casualty insurance, insurable interest is
required at the inception of the policy and when the loss occurs.

Admitted: “Admitted” in relation to a person, means entitled to transact insurance

business in this State, having complied with the laws imposing conditions
precedent to transaction of such business. (CIC 24)

Non-admitted: “Non-admitted in relation to a person, means not entitled to

transact insurance business in this State, whether by reason of failure to comply
with conditions precedent thereto, or by reason of inability so to comply. (CIC 25)

Domestic, foreign and alien insurers: Companies may be classified according

to where the company is domiciled meaning where the company has its principal
legal residence, where it was organized, or where it was incorporated.
Domestic: A company is considered to be a domestic insurer in the
state where it was organized. Therefore, any company organized under
the laws of the state of California is considered to be a domestic insurer in
California, whether or not it is admitted to do business in California. (CIC
26)

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 Foreign: A foreign insurer is an insurer organized under the laws of
another state within the United States, whether or not it is admitted to do
business. Thus, a company organized in Arizona is considered to be a
foreign insurer in California. (CIC 27)
Alien: An alien insurer is an insurer organized under the laws of any
jurisdiction other than a state of the United States, whether or not admitted
to do business in California. For instance, a company organized in
Canada is considered alien.

Person: “Person” means any person, association, organization, partnership,

business trust, limited liability company, or corporation. (CIC 19)

Insurer: Any person capable of making a contract may be an insurer, subject to

the restrictions of the code. (CIC 150)

Standard Market Insurer: An insurer who offers rates for insurance coverage to
insureds who have an average or better than average loss exposure

Reinsurance: A contract of reinsurance is one by which an insurer procures a

third person to insure him against loss or liability by reason of such original
insurance. (CIC 620) An insurance company cedes part of the risk to another
insurance company. The ceding insurer must disclose all knowledge and
information to the reinsurer. The original insured does not need to be informed
about the reinsurance contract. The ceding company will continue to service the
contract.

Insurance agent (Life): “Insurance agent” means a person authorized, by and on

behalf of an insurer, to transact all classes of insurance other than life, disability or
health insurance. (CIC 31)
Insurance agent (PC): insurance agent by this definition means someone who
holds a property broker-agent and/or casualty broker-agent license. Licenses to
act as a property broker-agent and/or casualty broker-agent agent are of the
following types: (1) Property which entitles the licensee to transact insurance
coverage on the direct or consequential loss or damage to property of every kind
and (2) Casualty which entitles the licensee to transact insurance coverage against
legal liability including that for death, injury, disability, or damage to real or personal
property. (CIC 1625)

Life-only agent: A life-only agent means an insurance agent authorized, by and

on behalf of a life insurer, to transact insurance on human lives including benefits
of endowment and annuities, and may include benefits in the event of death or
dismemberment by accident and benefits for disability income. (CIC 1626 [1];
1622)

A licensed life agent may present a proposal for insurance to a prospective

policyholder on behalf of a life insurer for which the life agent is not specifically
appointed and may send an application for insurance to that insurer. (Life agents

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cannot transmit an application to an insurer that only uses exclusive agents.) If a
policy of insurance is issued, the insurer is considered to have authorized the agent
to act on its behalf. The insurer must forward to the commissioner a notice of
appointment of the life agent not more than 14 days after the life agent submits an
application for insurance to the insurer for which the insurer issues a policy. Any
payment made by the prospective insured must be made in the form of a draft,
check, cashier’s check, traveler’s check, money order, or similar instrument made
payable to the insurer. (CIC 1704.5)

Accident and health agent: An accident and health license entitles the licensee
to transact insurance coverage for sickness, bodily injury, or accidental death and
may include benefits for disability income. (CIC 1626[2]) An accident and health
agent may be authorized to transact 24-hour care coverage pursuant to certain
requirements. (CIC 32) There is no such thing as a life solicitor or life broker in
California.

Broker: (a) An insurance broker is a person who, for compensation and on

behalf of another person, transacts insurance other than life, disability, or health
with, but not on behalf of, an insurer (CIC 33). It shall be presumed that the
person is acting as an insurance broker if the person is licensed to act as an
insurance broker, maintains the bond required by this chapter, and discloses,
in a written agreement signed by the consumer, all of the following:

(1) That the person is transacting insurance on behalf of the consumer.

(2) A description of the basic services the person will perform as a broker.
(3) The amount of all broker fees being charged by the person.
(4) If applicable, the fact that the person may be entitled to receive compensation
from the insurer, directly or indirectly, for the consumer's purchase of insurance
as a consequence of the transaction.

(b) If a transaction involves both a retail broker and a wholesale intermediary

broker, the wholesale intermediary broker shall be deemed to have satisfied its
disclosure obligations under this section if it provides written disclosure to the
retail broker of the criteria set forth in paragraphs (2), (3), and (4) of subdivision
(a).

(c) The presumption of broker status is rebutted as to any transaction in the

admitted market in which any of the following is present:

(1) The licensee is appointed, pursuant to Section 1704, as an agent of the

insurer for the particular class or type of insurance being transacted.
(2) The licensee has a written agreement with an insurer containing express
terms that authorize the licensee to obligate the insurer without first obtaining
notification from the insurer that the insurer has accepted, conditionally or
unconditionally, the submitted risk.
(3) The licensee is authorized, pursuant to a written agreement with an insurer, to
appoint other licensees as agents of the insurer, pursuant to Section 1704.

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(4) The licensee is authorized, pursuant to a written agreement with an insurer, to
pay claims on behalf of the insurer.

(d) In all other cases, the presumption of broker status is rebutted based on the
totality of the circumstances indicating that the broker-agent is acting on behalf of
the insurer.
(e) For purposes of this section, "totality of the circumstances" means evidence
indicating whether a broker-agent was acting on behalf of the insurer or was
acting on behalf of a third person. In determining the totality of circumstances, all
relevant facts and circumstances shall be reviewed and the review is not limited
to any particular fact or factors and this section does not require that any
particular circumstance receive greater or lesser weight. (CIC 1623)

There is no Life Broker or Accident & Health Broker.

Surplus lines broker: (CIC 1760) A surplus lines broker places insurance with
non-admitted insurers. A surplus lines broker may act as an agent for a non-
admitted insurer in the transaction of insurance business in California, advertise a
non-admitted insurer, and aid a non-admitted insurer to transact insurance
business in California.

It is a misdemeanor to transact for or advertise a non-admitted insurer

unless licensed as a surplus lines broker. Any person who willfully violates the
surplus lines regulations is guilty of a public offense and is punishable by
imprisonment in the state prison, or in a county jail, for not exceeding one year or
a fine not exceeding $10,000, or by both. (CIC 703;1764.7)

Solicitor: An insurance solicitor is a natural person employed to aid an

insurance agent or insurance broker in transacting insurance other than life,
disability or health. There is no such thing as a Life solicitor or Accident &
Health solicitor. Agents are appointed by insurance companies and represent
insurance companies. Solicitors are appointed by property broker-agent and/or
casualty broker-agents that have permanent licences’, not by insurance
companies. A solicitor cannot be appointed by more than one agent/broker at a
time. Solicitors have no power to bind coverage. Solicitors are licensed to sell
property and casualty products and may hold either property broker-agent and/or
casualty broker-agent or a Personal Lines broker/agent license. (CIC 1624)

Property & Casualty Licensee (aka Fire & Casualty) A property and casualty
licensee is a person authorized to act as an insurance agent, broker, or solicitor,
and a property and casualty broker-agent license is a license so to act. Licenses
to act as a property and casualty broker-agent under this chapter shall be of the
following types:

(1) Property, which shall entitle the licensee to transact insurance coverage on
the direct or consequential loss or damage to property of every kind, some
examples include auto, homeowners, flood, earthquake, commercial property.

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(2) Casualty, which shall entitle the licensee to transact insurance coverage
against legal liability, including that for death, injury, disability, or damage to real
or personal property some examples include liability, commercial general liability

Notice of appointment as an agent: When a notice of appointment is filed with

the Department of Insurance for a person licensed as a broker/agent by an insurer,
that person is deemed to be acting as an agent for that insurer (CIC 1731)

Life and disability insurance analyst: “Life and disability insurance analyst”
means a person who, for a fee or compensation of any kind, paid by or derived
from any person or source other than an insurer, advises, purports to advise, or
offers to advise any person insured under, named as beneficiary of, or having any
interest in, a life or disability insurance contract, in any manner concerning that
contract or his or her rights in respect thereto. (CIC 32.5)
The license qualifications for an insurance analyst are as follows (CIC 1831-
1849):

 Age 18 or older and a California resident.

 Makes a written application on a prescribed form.
 Answers under oath any questions asked by the commissioner.
 Has a good business reputation.
 Has thorough knowledge of life and disability insurance. No person shall
be eligible for a life and disability insurance analyst license unless for five
years preceding the date of the examination, he/she has worked as a life or
disability licensee or as an employee of such a licensee.
 Has not been connected with any business transaction that shows unfitness
to act in a fiduciary capacity.
 Has not willfully misstated any material fact in a license application or
obtained a license by concealment or misrepresentation.
 Is a fit and proper person to hold a license.
 Does not seek the license to avoid or prevent enforcement of the insurance
laws.
 Has passed the required examination.

A life and disability insurance analyst shall not receive any fee unless that
fee is based upon a written agreement signed by the party to be charged. The
agreement shall include a statement that the information and services concerning
insurance policies may be obtained directly from the insurer without cost, an outline
of the services to be performed for which a fee is charged, and the fee to be
charged. Additionally, if the licensee is also licensed as a life agent, there shall be
a statement indicating this fact. A copy of such agreement shall be retained for
not less than three years after the services have been fully performed. (CIC 1848)

An employee or officer of any insurer is not eligible for license as a life and
disability insurance analyst. A life insurer shall not pay a life and disability
insurance analyst any commission directly or indirectly, on any life or disability

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insurance transacted by and in the capacity as a life and disability insurance
analyst.

Anyone who acts or offers to act as a life analyst without a license can be
punished by a fine of up to $1,000 or imprisonment for up to one year, or both
imprisonment and fine.

Administrators: means any person who collects any charge or premium from, or
who adjusts or settles claims on, residents of this state in connection with life or
health insurance coverage or annuities or coverage. (CIC 1759)

Adjuster: (CIC 14021) An adjuster is a licensed person, other than a private

investigator, who for a fee or other consideration, investigates and collects
information for the purpose of adjusting or disposing of a claim under an insurance
policy. It is most often a property and casualty policy. The requirements are as
follows:

 Age 18 or older.
 Must not have committed any acts or violations of law for which a license
could be denied.
 Must have at least two years of experience (or the equivalent) in adjusting
insurance claims.
 Must meet any other qualifications established by the commissioner.
 Must pay the required license fee.

Public insurance adjuster: (CIC 15007) A public insurance adjuster is a licensed

individual who, for compensation, works on behalf of an insured in settling a claim
for loss or damage under a policy covering real or personal property.

Managing General Agent (MGA): Any person, firm, association, partnership, or

corporation who negotiates and binds ceding reinsurance contracts on behalf of
an insurer or manages all or part of the insurance business of an insurer
(including the management of a separate division, department or underwriting
office).

An MGA acts as an agent for that insurer and produces and underwrites an
amount of gross direct written premium equal to or more than 5 % of the
policyholder surplus as reported in the last annual statement of: (CIC 769.81[c])

(1) adjusts or pays claims in excess of an amount determined by the

commissioner, or (2) negotiates reinsurance on behalf of the insurer.

Bail Licensee: An insurer shall not execute an undertaking of bail except by and
through a person holding a bail license. A person shall not in this state solicit or
negotiate in respect to execution or delivery of an undertaking of bail or bail bond
by an insurer, or execute or deliver such an undertaking of bail or bail bond. (CIC
1800)

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Personal Lines Licensee: (CIC 1625.5) A personal lines licensee is a person
authorized to transact automobile insurance, as defined in Section 660, including
insurance for recreational vehicles used for noncommercial purposes, personal
watercraft insurance, residential property insurance, as defined in Section 10087,
including earthquake and flood insurance, inland marine insurance covering
personal property, and umbrella or excess liability insurance providing coverage
when written over one or more underlying automobile or residential property
insurance policies, and a personal lines broker-agent license is a license to so act.

Broker-Agent: A person licensed as a broker-agent shall be deemed to be

acting as an insurance agent in the transaction of insurance placed with those
insurers for whom a notice of appointment has been filed with the Insurance
Commissioner in accordance with Section 1704 and is then in force.

Limited Lines Automobile Insurance Agent:

1625.55. (a) A limited lines automobile insurance agent is a person authorized to
transact automobile insurance, as defined in Section 660. A limited lines
automobile insurance agent license is a license to so act.
(b) A license under this section shall be applied for and renewed, following
successful completion of a qualifying examination on this code, ethics, and
products sold under the license, in the same manner as provided in this chapter
for a license to act as a property broker-agent and/or casualty broker-agent.
(c) The commissioner shall require in advance a fee for filing any applications,
renewals thereof, or changes in outstanding licenses, or for the filing of other
required documents at an amount designated in this chapter for a personal lines
licensee, and for filing any notice of appointment or notice of termination at an
amount specified in Section 1751.3.
(d) A person licensed as a limited lines automobile insurance agent who makes
an application to the commissioner to become a property broker-agent and/or
casualty broker-agent pursuant to Section 1625 or a personal lines agent
pursuant to Section 1625.5 shall do all of the following:

(1) Submit an application on a form provided by the commissioner.

(2) Complete prelicensing education as specified in Section 1749.

(3) Take and pass a qualifying examination pursuant to Section 1676.

1625.56. “License year” for a limited lines automobile insurance agent shall be
determined as follows:
(a) Upon initial licensing, the license year starts on the date the license is issued.
(b) Subsequently, each license year starts the first day of the month following the
month in which the initial license was issued.
(c) A license year ends the following calendar year on the last calendar day of
the month in which the initial license was issued.

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1625.57. “License term” for a limited lines automobile insurance agent means all
of that two-year period beginning as described in subdivision (a) or (b) of Section
1625.56, as applicable, and ending the second succeeding year on the last
calendar day of the month in which the initial license was issued.

Transact: “Transact” as applied to insurance includes any of the following:

(a) Solicitation (CIC 35[a])

(b) Negotiations preliminary to execution (CIC 35[b])
(c) Execution of a contract of insurance (CIC 35[c])
(d) Transaction of matters subsequent to execution of the contract
and arising out of it (CIC 35[d]))

As noted above in the definitions section, an insurance agent, life-only

agent, accident and health agent, broker, and solicitor are licensed to transact
various lines of insurance. A person shall not act in any of the capacities defined
in transacting (solicitation, negotiation, execution, and transaction) unless he holds
a valid license from the commissioner authorizing him to act in such capacity. (CIC
1631) Any person who acts, offers to act, or assumes to act in a capacity for which
a license is required without a valid license so to act is guilty of a misdemeanor.
(CIC 1633)

The unlawful transaction of insurance business in willful violation of the

requirement for a certificate of authority is a public offense punishable by
imprisonment in the state prison, or in a county jail not exceeding one year, or by
fine not exceeding one hundred thousand dollars ($100,000), or by both that fine
and imprisonment, and shall be enforced by a court of competent jurisdiction on
petition of the commissioner. (CIC 700(b).

Transacting without a license: (CIC 1631;1633) A person may not conduct any
activities of an agent, broker, or solicitor unless he has a license issued by the
commissioner authorizing him to act in that capacity. Anyone who acts, offers to
act, or assumes to act in a capacity for which a license is required, without holding
a license, is guilty of a misdemeanor. This is punishable by a fine not exceeding
$50,000 or by imprisonment in a county jail for a period not exceeding one year,
or by both fine and imprisonment.

Types of insurance companies:

Stock insurers are corporations organized for the purpose of making a

profit for their stockholders. A stock company raises money by selling shares of
stock; the stockholders are the owners of the company; and the affairs of the
company are handled by a board of directors elected by the stockholders. The
type of policy issued by stock companies is called non-participating (non-par) as
the policyholders do not share in the company’s profits. When declared, dividends
are paid to the stockholders.

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 Mutual insurers are corporations owned by the policyowners. When a
person buys an insurance policy from a mutual insurer that person is becoming an
owner in the company as well as a policyholder. As an owner, the policyholder
votes for the board of directors. The policies issued by mutual insurers are referred
to as participating (par) policies as any surplus is returned to the policyowner in
the form of a dividend. Surplus can be defined as excess earned or saved by the
insurance company. Earned surplus is generated by:

 Mortality-----fewer people die than expected

 Interest------company earns more interest than assumed
 Expenses---company overhead is less than projected

Dividends are regarded by the federal government as a return to the

policyowners of excess premiums charged for the insurance coverage. As such,
dividends paid by mutual insurers are not taxable income. However, it also should
be noted that dividends cannot be guaranteed as surplus will vary from year to
year.

An incorporated mutual insurer may be converted into an incorporated stock

insurer. The process whereby a mutual insurer becomes a stock insurer is known
as demutualization or conversion. (CIC 11535)

Fraternal insurers (fraternal benefit societies or fraternals) are life

insurance carriers that are social organizations that normally are involved in
charitable activities. Fraternal societies usually are incorporated without capital
stock. To be considered a fraternal, the organization must be nonprofit, must have
a lodge system with a ritualistic form of work involved, and have an elective form
of government. Fraternal society insurance provides benefits for sickness,
accident and death and such insurance may be sold only to members of the society
for the benefit of its members and their families.

Distribution systems:

Agency system: Agents are appointed by insurers and solicit

applications on behalf of insurers. Agents may be either exclusive or
independent. The majority of policies are sold using the agency
system.
Direct response marketing is achieved by advertising through the mail, in
newspapers and magazines, on television and radio and the internet. If
someone is interested in the advertised products, he/she will respond to
the company for more information. Mass marketing is a cost effective
method of distribution and may achieve efficient market penetration.
Home service life insurance is a variation of industrial life insurance.
Industrial life insurance policies are small policies essentially to cover a
person’s last expenses. The agent is responsible for servicing the policies
and must personally collect the premiums on a weekly or monthly basis
and provide the client with a written receipt. The major difference with

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 home service life is that the face amount is larger. It normally is written
for amounts of $10,000 or $15,000 and the premiums are either debited
from a bank account or mailed.

Effective date of coverage: (C 1730.5) A life agent and a property broker-agent

and/or casualty broker-agent shall provide to all insureds or applicants at the time
of application or receipt of premium moneys the effective date of coverage, if
known, or the circumstances under which coverage will be effective if there exists
conditions precedent to coverage. This section applies only to coverage for
personal lines of insurance, such as private passenger automobile, homeowner
and renter insurance, personal liability, and individual disability and health
insurance.

Free insurance: No insurer shall participate in any plan to offer or effect any kind
or kinds of insurance or annuities in this state as an inducement to the purchase
or rental by the public of any property, real or personal or mixed, or services,
without a separate charge to the insured for such insurance, nor shall any agent,
broker, or solicitor arrange the sale of any such insurance. (CIC 777.1) This article
does not apply to insurance offered as a guarantee of the performance of goods
which is insurance to protect the purchasers of such goods nor does it apply to any
title insurance or life or disability insurance written to pay off the balance of a debt
in the event of the death or disability of the insured.

If any insurer, agent, broker, or solicitor willfully violates this provision

regarding free insurance, the commissioner may suspend or revoke the certificate
or license or other authority to do business or engage in an insurance occupation
for a period not exceeding one year.

Aiding non-admitted insurer to transact: (CIC 1760-1780) Except when

performed by a surplus line broker, the following acts are misdemeanors when
done in this State:

(a) Acting as agent for a non-admitted insurer in the transaction of

insurance business in this State.
(b) In any manner advertising a non-admitted insurer in this State.
(c) In any other manner aiding a non-admitted insurer to transact
insurance business in this State. (CIC 703)

The commissioner may penalize a person guilty of unauthorized dealings

with a non-admitted insurer. The guilty person also will be penalized monetarily
by the state.

Any person licensed by the commissioner who misrepresents to any surplus

lines broker any material fact regarding insurance coverage, or facts regarding
rules of submission or rates, or conspires to procure non-admitted insurance in
violation of the law, may have his license suspended, revoked, or denied.

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Surplus Lines Law: Any person may negotiate and effect insurance to protect
himself, herself, or itself against loss, damage, or liability with any non-admitted
insurer.

The rules limiting the insurance which may be placed with non-admitted
insurers do not apply to:

(1) Reinsurance of the liability of an admitted insurer.

(2) Insurance against perils of navigation, transit or transportation upon
hulls, freights or disbursements, or other shipowner interests; upon
goods, wares, merchandise and all other personal property and
interests therein, in course of exportation from or importation into any
country, or transportation coastwise, including transportation by land or
water from point of origin to final destination and including war risks;
and marine builder’s risks, drydocks and marine railways, including
insurance of ship repairer’s liability, and protection and indemnity
insurance, but excluding insurance covering bridges and tunnels.
(3) Aircraft insurance.
(4) Insurance on property or operations of railroads engaged in interstate
commerce.

The insurance specified in the above numbers 2, 3, and 4 may be placed

with a non-admitted insurer only by and through a special lines’ surplus lines
broker.
A surplus line broker may solicit and place insurance with non-admitted
insurers only if that insurance cannot be procured from insurers admitted for the
particular class or classes of insurance and that actually write the particular type
of insurance in this state. Each surplus line broker shall be responsible to ensure
that a diligent search is made among admitted insurers before placing insurance
with a non-admitted insurer. It shall be presumed that insurance is placed in
violation of the code if the insurance is actually placed with a non-admitted insurer
at a lower rate of premium or lower premium than the lowest rate of premium or
the lowest premium that could be obtained from an admitted insurer unless, at the
time the insurance attaches, there is filed with the commissioner a statement
describing the insurance, specifying the rate and the nearest procurable rates from
admitted insurers. The statement shall include an explanation of the reasons that
the insurance must be placed with a non-admitted insurer even though it is
available from an admitted insurer.

Every non-admitted insurer, in the case of insurance to be purchased by a

resident of this state, and surplus line broker, in the case of any insurance with a
non-admitted carrier to be transacted by the surplus line broker, shall be
responsible to ensure that, at the time of accepting an application for any insurance
policy, other than a renewal of that policy, issued by a non-admitted insurer, the
signature of the applicant on a disclosure statement. The disclosure statement
shall be in boldface 16-point type on a freestanding document. In addition, every
policy issued by a non-admitted insurer and every certificate evidencing the

Insurance Code 13
placement of insurance shall contain, or have affixed to it by the insurer or surplus
line broker, the disclosure statement in boldface 16-point type on the front page of
the policy. In the case where the applicant has not received and completed the
signed disclosure form, he/she may cancel the insurance so placed.

The following notice shall be provided to policyholders and applicants for

insurance with a non-admitted insurer and shall be printed in English and in the
language principally used by the surplus line broker and non-admitted insurer to
advertise, solicit, or negotiate the sale and purchase of surplus line insurance. The
surplus line broker and non-admitted insurer shall use the appropriate bracketed
language for application and issued policy disclosures:

“NOTICE:

1. THE INSURANCE POLICY THAT YOU (HAVE PURCHASED) (ARE

APPLYING TO PURCHASE) IS BEING ISSUED BY AN INSURER THAT
IS NOT LICENSED BY THE STATE OF CALIFORNIA. THESE
COMPANIES ARE CALLED “NON-ADMITTED” OR “SURPLUS LINE”
INSURERS.
2. THE INSURER IS NOT SUBJECT TO THE FINANCIAL SOLVENCY
REGULATION AND ENFORCEMENT WHICH APPLIES TO
CALIFORNIA LICENSED INSURERS.
3. THE INSURER DOES NOT PARTICIPATE IN ANY OF THE
INSURANCE GUARANTEE FUNDS CREATED BY CALIFORNIA LAW.
THEREFORE, THESE FUNDS WILL NOT PAY YOUR CLAIM OR
PROTECT YOUR ASSETS IF THE INSURER BECOMES INSOLVENT
AND IS UNABLE TO MAKE PAYMENTS AS PROMISED.
4. CALIFORNIA MAINTAINS A LIST OF ELIGIBLE SURPLUS LINE
INSURERS APPROVED BY THE INSURANCE COMMISSIONER. ASK
YOUR AGENT OR BROKER IF THE INSURER IS ON THAT LIST.
5. FOR ADDITIONAL INFORMATION ABOUT THE INSURER YOU
SHOULD ASK QUESTIONS OF YOUR INSURANCE AGENT, BROKER,
OR “SURPLUS LINE” BROKER OR CONTACT THE CALIFORNIA
DEPARTMENT OF INSURANCE, AT THE FOLLOWING TOLL-FREE
TELEPHONE NUMBER: ____.”

Absence of Binding Authority: Surplus lines brokers cannot bind risk with non-
admitted insurers. Additionally, No surplus line broker shall issue any evidence
of insurance or cause or purport to cause any risk to be insured by a non-
admitted insurer or advise any insured or applicant for insurance that coverage
has been or will be obtained from a non-admitted insurer unless:

(a) The broker has prior written authority from the non-admitted insurer to cause
the risk to be insured;

Insurance Code 14
(b) The broker has received advice in the ordinary course of business that the
coverage has been obtained
(c) A policy of insurance covering the insured for the risk has actually been
issued by the nonadmitted insurer and delivered to the insured or his or her
representative.

The list of eligible surplus lines insurers maintained by the California Department
of Insurance is known as the LASLI list (List of Approved Surplus Lines Insurers).
The following link will provide access to this list: [Link]
consumers/120-company/07-lasli/[Link]

License qualifications: An applicant for an insurance license must submit (1) the
Department of Insurance application form, (2) fees, and (3) certificates showing
completion of the necessary course material. When applying as a life-only agent
or an accident and health agent, the candidate must complete 20 hours of the
material applicable to the license as well as 12 hours on code and ethics. If
applying for a life-only/accident and health license, 40 hours of course material
must be completed in addition to the 12 hours on code and ethics. The property
broker-agent and/or casualty broker-agent must complete 40 hours of material
regarding the lines of insurance they may sell as well as 12 hours of code and
ethics. A person applying for a property and casualty personal lines license will
need to complete 20 hours of study regarding personal lines and 12 hours of code
and ethics. The commissioner may make an investigation or may require
additional information, documents, or statements to determine if the applicant has
met all the requirements for a license. The applicant will be required to pass the
state licensing examination and achieve a score of 60% correct.

A life-only agent, an accident and health agent, a property broker-agent

and/or casualty broker-agent, or a personal lines broker/agent to act as an
insurance agent shall have filed on his behalf with the commissioner a notice of
appointment to act as an agent executed by an admitted insurer. Additional
notices of appointment may be filed by other insurers before the license is issued
and thereafter. (CIC 1704) Every property broker-agent and/or casualty broker-
agent or personal lines solicitor applicant shall have filed on his behalf a notice
executed by a property broker-agent and/or casualty broker-agent or personal
lines broker/agent agreeing to employ the applicant. To act as a property broker-
agent and/or casualty broker-agent or personal lines broker, a $10,000 bond must
be filed with the Department of Insurance.

An agent’s appointment by an insurer serves as notice to the commissioner

that the insurer has deemed the applicant to be a person of good reputation and
character. Appointments are effective as of the date the notice of appointment is
signed by the insurer and continues in force until (1) the cancellation or expiration
of the license applied for or held at the time the appointment was filed or (2) one
of the parties (licensee or insurer) files a notice of termination. When all the

Insurance Code 15
appointments of a licensed life-only agent, accident and health agent, property
broker-agent and/or casualty broker-agent, personal lines agent, or solicitor are
terminated, the license becomes inactive. If a property broker-agent and/or
casualty broker-agent or personal lines broker’s bond is cancelled, his license
becomes inactive. The license may be reactivated any time before it expires by
filing a new appointment or broker’s bond. An inactive license shall not permit its
holder to transact any insurance for which a valid, active license is required. (CIC
1704a; 1705)

Certificate of convenience: Upon the filing of an application for a license, the

commissioner may make such investigation and require the filing of such
supplementary documents, affidavits and statements as may be necessary to
obtain a full disclosure of such information as will aid him in determining whether
the prerequisites for the license have been met. If the applicant makes a showing
satisfactory to the commissioner that he meets all such prerequisites, the
commissioner may issue a certificate of convenience and, upon the applicant
meeting any applicable examination requirements, may issue a permanent
license. (CIC 1666)

Causes for denial after a hearing: The commissioner may deny a license, after
a notice and hearing into the issue, for any of the following reasons: (CIC 1668)

a. The applicant is not properly qualified to perform the duties of a person to

hold the license for which applied.
b. Granting the license would not be in the public interest.
c. The applicant does not intend actively and in good faith to conduct business
with the general public which would be permitted under the license for which
applied.
d. The applicant is not of good business reputation.
e. The applicant lacks integrity.
f. The applicant has been refused a professional, occupational, or vocational
license, or has had such a license suspended or revoked for a reason that
should preclude the granting of an insurance license.
g. The applicant is seeking the license to avoid or prevent the operation or
enforcement of the state’s insurance laws.
h. The applicant has knowingly or willfully made a misstatement in the license
application or in a document filed to support the application, or has made a
false statement to the commissioner in testimony given under oath.
i. The applicant has previously engaged in a fraudulent practice or act or has
conducted a business in a dishonest manner.
j. The applicant has shown that he has been incompetent or untrustworthy in
the conduct of a business, or has exposed the public or those dealing with
him to the danger of loss, by committing a wrongful act or practice in the
course of business.
k. The applicant has knowingly misrepresented the terms or effect of an
insurance policy or contract.

Insurance Code 16
 l. The applicant has failed to perform a duty expressly required by the
insurance code or has committed an act expressly forbidden by the code.
m. The applicant has been convicted of a felony, a misdemeanor in violation of
any insurance laws, or a public offense that involved fraud or dishonesty
involving money or property.
n. The applicant has aided or abetted another person in an act or omission for
which that person’s license could be suspended, revoked, or refused.
o. The applicant has allowed any person employed by him to violate any
provision of the insurance code.
p. The applicant has violated any law relating to conduct of a business which
could lawfully be done only by authority conferred by such license.

A judgment, plea or verdict of guilty or a conviction following a plea of nolo

contendere is considered to be the same as a conviction.

Denial of license application without a hearing: The commissioner may deny

an application for a license without conducting a hearing for any of the following
reasons: (CIC 1669)

a. The applicant has been convicted of a felony.

b. The applicant has been convicted of a misdemeanor denounced by any
insurance law.
c. The applicant has had a previous application denied for cause within the
last five (5) years.
d. The applicant has had a license suspended or revoked for cause within
the last five (5) years.

License revocation or suspension: The commissioner may suspend or revoke

a permanent license for any of the same grounds for which a license application
may be denied. As noted above, some grounds require a hearing while others do
not. (CIC 1738)

Title 18 United State Code Sections 1033-1034: According to Section 1033 it is

a criminal offense for an individual who has been convicted of a felony involving
dishonesty or breach of trust to willfully engage or participate in the business of
insurance unless that person has first obtained the written consent of the
appropriate regulatory official. Furthermore, it is a criminal offense for any person
to willfully employ or willfully permit such prohibited persons to participate in the
business of insurance without the required written consent.

The California Department of Insurance has jurisdiction under this act to

consider requests for written consent filed by prohibited persons who propose to
participate in the business of insurance in California with a domestic insurer or a
resident licensee. Such prohibited persons who propose to engage in the business
of insurance in California shall:

Insurance Code 17
  File a 1033 consent waiver application
 Pay the application fee
 Provide all required documentation
 Receive written consent before engaging in such business

Disability insurance—dual authority: A person licensed as either a property

and casualty agent/broker or as an accident and health agent may be authorized
to transact disability insurance for an admitted insurer by filing a notice of
appointment from that insurer. (CIC 1673)

Implied declarations with appointment: (CIC 1705)

1. When an insurer or licensed property and casualty broker/agent files an

appointment for an agent or solicitor applying for an original license, the
insurer or broker/agent is declaring that the applicant is of good reputation
and is worthy of the license sought.
2. If an applicant will not be issued a certificate of convenience pending
examination, the insurer or broker/agent who files the appointment is
declaring that the applicant has had the required experience or instruction
in the classes of insurance for which the license is sought or that he/she will
be given the necessary instruction within 30 days after the license is issued.
3. If the applicant is a co-partnership, corporation, or association, the insurer
making the appointment is deemed to have declared that the applicant is of
good reputation and worthy of the license sought. This applies to the
business organization and to each individual authorized to exercise agency
powers who is named in the application. These implied declarations apply
to any additional persons added to the license at a later date.

Termination of license: (CIC 1708-1714)

1. A licensee may voluntarily surrender his license for cancellation at any time
by delivering the license to the commissioner. If the license is in the
possession of the insurer or the licensee’s employer, the license may be
surrendered by providing written notice to the commissioner of the
licensee’s desire to cancel.
2. All licenses issued to a natural person terminate when the person dies.
3. An organization ceases to exist as an entity eligible to hold a license upon
the following:
a. A co-partnership dissolves or there is a change in membership.
b. An association terminates.
c. A corporation is dissolved.
4. A co-partnership may continue to transact business under its license if:
a. The surviving partnership files an application within 30 days registering
the change in membership, pays the required fee, and furnishes the
required bond (if acting as a broker).
b. At least one partner from the predecessor partnership continues to
exercise the powers of agency or brokership with the new partnership.

Insurance Code 18
 c. The application is signed by a general partner.
Note: To return the old license to the commissioner with signatures of
the original members is not a requirement.
5. When a licensed entity terminates, its right to transact insurance also
terminates. However, a natural person, partnership, association, or
corporation may continue to operate under an existing license as a different
organization if:
a. A natural person is named to exercise the agency or brokerage
powers.
b. There has been no substantial change in ownership or control of the
licensed insurance business.
c. Within 30 days after the change, the person or successor partnership,
association or corporation files a license application and pays
necessary fees.
6. The license of an organization licensed as a life-only agent, accident and
health agent, property and casualty broker/agent, or personal lines
broker/agent becomes inoperative when the last natural person named
on the license is removed or is no longer eligible to be licensed. The
license will not be reactivated unless all deficiencies are corrected,
including the addition of a natural person to transact insurance under
the organization’s license.

License renewal: (CIC 1720) An application on a form prescribed by the

commissioner for the renewal of a license filed on or before the last day of the
period for which the previous license was issued, accompanied by the renewal fee,
shall entitle the applicant to continue operating under the existing license for 60
days after its specified expiration date or until notified by the department of
insurance that the renewal application is deficient.

Printing license number on documents and advertisements: (CIC 1725.5)

Every licensee shall prominently print his license number on business cards,
written price quotations for insurance products, and printed advertisements for
insurance products distributed exclusively in California. The license number must
be printed in the same size type as any telephone number, address, or fax number.
If the licensee maintains more than one organization license, one of the
organization license numbers is adequate for compliance.

In the case of solicitors working as exclusive employees of a motor club,

organizational license numbers shall be used. These requirements do not apply
to general advertisements of motor clubs that simply list insurance products as one
of several services offered by the motor club and do not provide any details
regarding insurance products.

Any person in violation of this section is subject to a fine of $200 for the first
offense, $500 for the second offense, and $1,000 for the third and subsequent
offenses. The penalty will not exceed $1,000 for any one offense. Separate
penalties will not be imposed upon each piece of printed material that does not

Insurance Code 19
conform to the requirements of this regulation. The money from these fines will be
deposited into the Insurance Fund.

Internet advertisements: (CIC 1726) A person who is licensed in this state as an

insurance agent or broker, advertises insurance on the Internet, and transacts
insurance in this state, shall identify all of the following information on the Internet,
regardless of whether the insurance agent or broker maintains his/her Internet
presence or if the presence is maintained on his/her behalf:

1. His/her name as it appears on his/her insurance license and any

fictitious name approved by the commissioner.
2. The state of his/her domicile and principal place of business.
3. His/her license number.
A person shall be deemed to be transacting insurance in this state when the person
advertises on the Internet whether the licensee maintains his/her Internet presence
or if it is maintained on his/her behalf and does any of the following:
1. Provides an insurance premium quote to a California resident.
2. Accepts an application for coverage from a California resident.
3. Communicates with a California resident regarding one or more terms
of an agreement to provide insurance or an insurance policy.
Continuing Education: Licensees are subject to the following continuing education requirements:
License Type CE Requirements
Life Only 24 hours per license term including 3 hours of Ethics
Accident & Health 24 hours per license term including 3 hours of Ethics
Life AND Accident & Health 24 hours per license term including 3 hours of Ethics
Property & Casualty 24 hours per license term including 3 hours of Ethics
Property Only 24 hours per license term including 3 hours of Ethics
Casualty Only 24 hours per license term including 3 hours of Ethics
Personal Lines 24 hours per license term including 2 hours of Ethics
Limited Lines Auto 20 hours per license term including 2 hours of Ethics
Long Term Care –For licensees issued a 8 hours LTC training in EACH of the first four 12-
license AFTER January 1, 1992 month periods, then 8 hours per license term
Long Term Care –For licensees issued a 8 hours LTC training per license term
license BEFORE January 1, 1992
Licensee soliciting CA Partnership LTC Individuals who will be involved in the sale or marketing of long-
term care insurance policies certified by the California
Partnership for Long-Term Care, are required to complete eight
(8) hours of general long-term care continuing education (CE)
and 8 hours of classroom only CE specifically on the California
Partnership for Long-Term Care prior to the marketing of any
Partnership certified policies/certificates. After your initial
education requirement has been met, you are required to repeat
eight hours of classroom training on the Partnership each two-
year license approval period.
Licensee soliciting Annuities 8 hours of Annuities to begin, then 4 hours per
license term (**Completion of the 8-hour annuity
training DOES NOT SATISFY the 4-hour
requirement**)

A license year upon initial licensing starts on the date the license is
issued. After that, each license year starts the first day of the month
following the month in which the initial license was issued. A license year
ends the following calendar year on the last calendar day of the month in

Insurance Code 20
which the initial license was issued. A license term is for two years. (CIC
1629-1630)

Failing to complete the continuing education requirements results in

termination of license. In order to reactivate the license, the individual must
complete the necessary continuing education requirements, pay late penalties
and fees, and reinstate all appointments and endorsements. (CIC 1749.3)

Everyone has a need for some type of insurance during his/her lifetime.
Consequently, the public is relying on the advice of insurance licensees to make
sure that they have adequate insurance to protect their family and assets. The
agent must be careful in identifying a customer’s needs and then should make
recommendations of appropriate products and services. The agent should keep
in touch with his clients and conduct periodic reviews to ascertain that their
insurance coverage is adequate to meet current circumstances. Agents should
protect the confidential relationship they have with their clients.

To be professional, agents must observe insurance laws and the rules of

the insurance companies that they represent. Agents must accurately and
truthfully represent products and services. It is important to use simple language
to make sure clients understand what the agent is saying. In other words,
layman’s language should be used when possible. Agents should maintain a
friendly attitude toward competitors. Criticizing other agents and companies
does not reflect a professional attitude. Agents should always be careful not to
make misleading remarks about insurance companies or insurance products.

As a large percentage of the population has no knowledge about

insurance, it is essential that the agent be well informed. Part of being informed
is to constantly keep updated by doing continuing education courses and reading
insurance trade journals and business publications. By being more
knowledgeable, the agent will be better able to serve clients. The most important
thing for the agent to remember is to place the client’s welfare first, not his/her
own. By keeping the foregoing in mind, the agent will provide exemplary service
to clients.

Change of address: (CIC 1729) Every licensee and applicant for a license must
immediately notify the commissioner in writing of any change in his residence
address, business address, or mailing address. This must include licensee’s
email address. The CDI sends notices and renewals to the email address so it is
important the agent’s maintain a current email address with the CDI

Notice: Any notice required to be given to any person by any provision of the code
may be given by mailing notice, postage prepaid, addressed to the person to be
notified at his residence or principal place of business in California. The affidavit
of the person who mails the notice, stating the facts of such mailing, is prima facie
evidence that the notice was thus mailed. (CIC 38)

Insurance Code 21
Agency names: (CIC 1724.5, 1729.5) Every individual and organization licensee
and every applicant for such a license shall file with the commissioner in writing
the true name of the individual or organization and also all fictitious names under
which he conducts or intends to conduct his business and after licensing shall file
with the commissioner any change in or discontinuance of such names.
The commissioner may in writing disapprove the use of any true or fictitious name
(other than the bona fide natural name of an individual) by any licensee on any of
the following grounds:

1. The name interferes with or is too similar to a name already filed and used
by another licensee.
2. Using the name may mislead the public in any way.
3. The name states or implies that the licensee is an insurer, motor club,
hospital service plan or that the licensee is entitled to engage in insurance
activities not allowed under the license.
4. The name states or implies that the licensee is an underwriter. However,
this does not prohibit a natural person from using a designation like
Chartered Life Underwriter (CLU) or Charter Property and Casualty
Underwriter (CPCU) or a trade association whose members are individually
licensed from using a name that includes the word “underwriter” (e.g.
National Association of Life Underwriters).
5. The licensee has filed and has not discontinued use of more than two
names, including the true name. A licensee who has bought an insurance
business may use two additional names used by the previous owner(s) in
conducting the business.

A licensee may not continue to use a true or fictitious name after the
commissioner has notified the licensee in writing to stop. If there are mitigating
facts in connection with the use of a particular name, the commissioner may permit
continued use of the name for a reasonable time if there are conditions imposed
that adequately protect the public.

A property broker-agent and/or casualty broker-agent or life-only and/or

accident and health agent who has a service contract with a corporation licensed
under this code or who is a stockholder or member of any incorporated association
or corporation organized under the Corporations Code for the purpose of providing
services to property broker-agent and/or casualty broker-agent or life-only and/or
accident and health agents may use the name of such a corporation or association
on any stationery or advertisements and other written or printed matter used to
identify the business of the property broker-agent and/or casualty broker-agent or
life-only and/or accident and health agent provided that the name of the property
broker-agent and/or casualty broker-agent or life-only and/or accident and health
agent is clearly identified as bearing only that relationship to the corporation or
association in one of the following ways:
 “Representing______;”
 “A stockholder of______:”
 “Placing business through______:”

Insurance Code 22
  “Using services of______.”

Policy defined: The written instrument, in which a contract of insurance is set

forth, is the policy. (CIC 380)

Required contents: A policy shall specify:

(a) The parties between whom the contract is made.

(b) The property or life insured.
(c) The interest of the insured in property insured, if he is not the absolute
owner thereof.
(d) The risks insured against.
(e) The period during which the insurance is to continue.
(f) Either:
(1) A statement of the premium, or
(2) If the insurance is of a character where the exact premium is only
determinable upon the termination of the contract, a statement of the basis
and rates upon which the final premium is to be determined and paid. (CIC
381)

The financial rating of the insurer is not required to be specific in the insurance
policy.

Parties to the contract: Any person capable of making a contract may be an

insurer, subject to the restrictions imposed by the code. (CIC 150) Any person
except a public enemy may be insured. (CIC 151)

If the insured has no insurable interest, the contract is void. (CIC 280) The
measure of insurable interest in property is the extent to which the insured might
be damnified by loss or injury thereof. (CIC 284) An interest in property insured
must exist when the insurance takes effect, and when the loss occurs, but need
not exist in the meantime; an interest in the life or health of a person insured must
exist when the insurance takes effect, but need not exist thereafter or when the
loss occurs. (CIC 286)

Concealment: Concealment is defined as the neglect to communicate that which

a party knows and ought to communicate. Whether or not concealment is
intentional or unintentional, the injured party has the right to rescind the insurance
contract. Rescission means the contract is made null and void. All parties to a
contract shall communicate in good faith all information believed to be material to
the contract.

Each party to the contract must: (1) communicate in good faith with one
another; (2) disclose all facts of which the party has knowledge and which are of
importance to the contract; and (3) identify all facts that the party cannot warranty
and of which the party has no means to ascertain.

Insurance Code 23
 It is not necessary to disclose to the other party: (1) information which the
other party already has knowledge; (2) information which, in the exercise of
ordinary care, the other ought to know, and of which the party has no reason to
suppose him ignorant; (3) information to which the other party waives
communication; and (4) information which is not material to the contract. (CIC 330-
333)

Materiality: Materiality is to be determined not by the event, but solely by the

probable and reasonable influence of the facts upon the party to whom the
communication is due, in forming his estimate of the disadvantages of the
proposed contract, or in making his inquiries. (CIC 334)

Each party to a contract of insurance is bound to know all the general

causes open to inquiry that may affect either the political or material perils
contemplated. The right to information of material facts may be waived either by
the terms of insurance or by neglect to make inquiries as to such facts where they
are distinctly implied in other facts which are communicated. Information regarding
the nature or amount of one’s insurable interest need not be communicated unless
in response to an inquiry. An intentional and fraudulent omission on the part of
one insured to communicate information of matters proving or tending to prove the
falsity of a warranty entitles the insurer to rescind. (CIC 335-338)

Representation: A representation is a statement to the best knowledge and belief

of the party making the statement. A representation can be written or oral. The
language of a representation is to be interpreted by the same rules as a contract
in general. A representation as to the future is a promise, unless it is merely a
statement of belief or an expectation. A representation cannot qualify an express
provision in a contract of insurance, but it may qualify an implied warranty. A
representation may be made at the time of, or before, issuance of the policy. A
representation may be altered or withdrawn before the insurance is effected, but
not afterwards. (CIC 355) The completion of the contract of insurance is the time
to which a representation must be presumed to refer.

When an insured has no personal knowledge of a fact, he may nevertheless

repeat information which he has upon the subject, and which he believes to be
true, with the explanation that he does so based on the information of others. He
is not responsible for its truth, unless it proceeds from an agent of the insured,
whose duty it is to give the information.

A representation is considered to be false when the facts fail to correspond

with its assertions or stipulations. (CIC 358) If a representation is false in a material
point, the injured party is entitled to rescind the contract from the time the
representation becomes false. The materiality of a representation is determined
by the same rule as the materiality of a concealment. All of the above provisions
apply to the modification of a contract of insurance as well as to the original
contract. (CIC 350-361)

Insurance Code 24
Opinion: Neither party to a contract of insurance is bound to communicate, even
upon inquiry, information of his own judgment upon the matters in question. (CIC
339)

Misrepresentation: (CIC 780-784) A misrepresentation is a false oral or written

statement made with the intent to defraud another. An insurer or an insurance
licensee shall not cause or permit to be issued, circulated or used, any
misrepresentation of the following:

(1) The terms of a policy issued by the insurer or sought to be negotiated

by the person making or permitting the misrepresentation.
(2) The benefits or privileges promised thereunder;
(3) The future dividends, payable thereunder. (CIC 780)
Twisting: A person shall not make any representation or comparison of insurers
or policies to an insured which is misleading, for the purpose of inducing or tending
to induce him to lapse, forfeit, change or surrender his insurance, whether on a
temporary or permanent plan. (CIC 781)

Any person violating the rules regarding misrepresentation or twisting may

be fined up to $25,000 or in a case in which the loss of the victim exceeds $10,000,
by a fine not exceeding three times the amount of the loss suffered by the victim,
by imprisonment in a county jail for a period not to exceed one year, or by both a
fine and imprisonment. Following a hearing, the commissioner may suspend the
license of the insurance producer for up to three years. If an insurer or its
representatives violate the rules regarding misrepresentation or twisting, the
commissioner, after a hearing, may suspend the insurer’s certificate of authority to
do the class of insurance in respect to which the violation occurred. (CIC 782- 783)

Any person may be compelled to testify and produce books and writings at
the trial or hearing of any person charged with violating any provision regarding
misrepresentation and twisting even though such testimony or evidence may
incriminate him. A person shall not be prosecuted for any act concerning which
he is compelled so to testify or produce evidence, except for perjury committed in
so testifying. (CIC 784)

Warranty: A warranty is a guaranteed truth. Warranties are either express or

implied. A statement in a policy of a matter relating to the person or thing insured,
or to the risk, as a fact, is an express warranty thereof. An implied warranty is a
statement, not in writing, that insurable conditions exist. An implied warranty is
included in the policy even though not specifically stated in it. A representation in
an insurance contract qualifies as an implied warranty.

A particular form of words is not necessary to create a warranty. Every

express warranty made at or before the execution of a policy shall be contained in
the policy or in another instrument signed by the insured and made part of the
policy. A warranty may relate to the past, the present, the future, or to any or all
of these. A statement in a policy that imports that there is an intention to do or not

Insurance Code 25
to do a thing, which materially affects the risk, is a warranty that such act or
omission will take place. (CIC 440-445)

If a loss insured against takes place and the performance of the warranty
has become unlawful at the place of the contract or impossible, the omission to
fulfill the warranty does not void the policy. If there is a violation of a material
warranty, the wronged party may rescind the contract. The breach of an immaterial
warranty will not void the policy unless the policy states that a violation of specified
provisions will void it. A breach of warranty without fraud merely exonerates an
insurer from the time that it occurs, or where the warranty is broken in its inception,
prevents the policy from attaching to the risk. (CIC 447)

Rescission: To rescind a contract is to terminate or void the contract. The policy

is considered null and void from the beginning and treated as if it had never existed.
As noted above, a wronged party has the right to rescind the contract when there
has been a material concealment whether intentional or unintentional (CIC 331),
an intentional and fraudulent omission proving the falsity of a warranty (CIC 338),
a material false representation (CIC 359), or a violation of a material warranty or
other material provision of a policy (CIC 447).

Unfair trade practices: (CIC 790-790.10) The insurance industry is subject to the
laws of California which apply to all types of business, including, but not limited to,
the Unruh Civil Rights Act, anti-trust, and unfair business practice laws. The
purpose of the rules regarding unfair practices is to define and regulate trade
practices in the business of insurance that are considered to be unfair, deceptive,
or misleading. These provisions apply to all types of insurers and to all producers
engaged in the insurance business. No one may engage in any practice that is
prohibited by law or that is considered to be an unfair method of competition or an
unfair or deceptive trade practice in the business of insurance.

The article regarding unfair trade practices applies to reciprocal and

interinsurance exchanges, Lloyds insurers, fraternal benefit societies, fraternal fire
insurers, grants and annuities societies, insurers holding certificates of
exemptions, motor clubs, nonprofit hospital associations, life agents,
broker/agents, surplus line brokers and special lines surplus line brokers as well
as all other persons engaged in the business of insurance.

The following are unfair trade practices:

(a) Misrepresentation. It is against the law to make, issue, or circulate

any estimate, illustration, circular or statement which:
1. Misrepresents the benefits, terms, or advantages of an insurance
policy.
2. Misrepresents the dividends to be paid on an insurance policy.
3. Misrepresents the dividends paid in the past on a policy or similar
policies.

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 4. Misrepresents the financial condition of an insurer or the legal
reserve system used by an insurer.
5. Uses a policy name that misrepresents the true nature of a policy
or class of policies.
6. Makes a misrepresentation to a policyholder that induces that
policyholder to lapse, forfeit, or surrender his policy.
(b) Untrue or deceptive information about a person engaged in
insurance. It is an unfair practice to advertise or distribute information
about the insurance business, an insurer, or any person engaged in the
business of insurance which is untrue, deceptive, or misleading.
(c) Boycott, coercion, intimidation. It is unlawful to commit or conspire
to commit an act of boycott, coercion, or intimidation which results in
unreasonable restraint of, or monopoly in the business of insurance.
(d) Filing false financial statement. It is unlawful to knowingly file with
any public official or to publish, circulate, or place before the public a
false statement of an insurer’s financial condition, with intent to deceive.
(e) False entries. It is against the law to knowingly make an entry or
deliberately omit an entry of a material fact in a book, report, statement
or record which an insurer is required to file with the insurance
department or any other public agency with intent to deceive a public
official or examiner.
(f) Unfair discrimination. It is prohibited to make or allow unfair
discrimination between persons of the same class and life expectancy
in the rates charged or the terms, conditions, benefits, or dividends of
a life insurance policy or an annuity. Differences based on sex are
permitted it they can be substantiated by mortality data and other
statistical information.
(g) Advertising membership in the state’s Guarantee Association.
Although membership in the California Insurance Guarantee
Association is required for all insurers which offer the kinds of insurance
protected by the Association, a member insurer may not advertise
directly or indirectly that it is an Association member or that it is insured
against insolvency.
(h) Unfair claims practices. The following unfair claims practices are
prohibited:
1) Misrepresenting to claimants any pertinent facts or policy
provisions which relate to the coverage at issue.
2) Failing to acknowledge and act reasonably promptly on
communications relative to policy claims.
3) Failing to adopt and implement reasonable standards for the
prompt investigation and processing of claims.
4) Failing to affirm or deny coverage within a reasonable time after
proof of loss statements have been completed and submitted.
5) Failing to make prompt, fair, and equitable settlement of claims
where the company’s liability has become reasonably clear.
6) Requiring claimants to sue to recover amounts due under a policy
by offering substantially less than the amounts ultimately

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 recovered in lawsuits brought by insureds, when insureds have
made claims for amounts similar to those ultimately recovered.
7) Trying to settle a claim for less than a reasonable person would
expect to receive by referring to printed advertising material
accompanying or made part of the application.
8) Trying to settle a claim on the basis of an application which was
altered without the knowledge and consent of the insured.
9) After payment of a claim, failing to inform insureds or
beneficiaries of the coverage under which payment was made,
when such information has been requested by them.
10) Telling an insured or claimant that the insurer will appeal any
judgment in favor of the claimant or insured in order to get him to
accept less than the amount awarded in arbitration.
11) Delaying an investigation or settlement of a claim by requiring
the insured, claimant, and/or physician to file a preliminary claim
report, then making them file formal claim papers which contain
substantially the same information.
12) Failing to settle claims promptly where liability is clear under one
section of the policy in order to influence settlement under
another section of the policy.
13) Failing to provide promptly a reasonable explanation of the basis
relied on in the insurance policy for denying a claim or offering a
compromise settlement.
14) Directly advising a claimant not to obtain the services of an
attorney.
15) Misleading a claimant about the applicable statute of limitations.
16) Delaying the payment of or providing hospital, medical, or
surgical benefits for services rendered for AIDS for more than 60
days after the insurer has received a claim in order to investigate
and determine if the claim was for a pre-existing condition. Time
spent waiting for information from an attending physician or other
health care provider is not counted in this 60- day period.

Any person who engages in any unfair method of competition or any

unfair or deceptive act or practice is liable to the state for a civil penalty to
be fixed by the commissioner, not to exceed five thousand dollars ($5,000)
for each act, or, if the act or practice was willful, a civil penalty not to exceed
ten thousand dollars ($10,000) for each act. The commissioner shall have
the discretion to establish what constitutes an act.

If any person violates a cease and desist order or an order of the court,
after it has become final and while it remains in effect, the commissioner
may call a hearing to determine whether such violation has occurred. If it is
determined that a violation was committed, the commissioner may order the
person to pay either (1) a fine up to $5,000 if the violation is not found to be
willful plus the amount of any outstanding penalty for violating the code or
(2) a fine of up to $55,000 if the violation is found to be willful plus the

Insurance Code 28
 amount of any outstanding penalty for violating the code. For any
subsequent violation of a cease and desist order, court order, or order to
pay a penalty, the commissioner may, after a hearing, suspend or revoke
the person’s license or Certificate of Authority for a period of up to one year.

The commissioner shall have power to examine and investigate into

the affairs of every person engaged in the business of insurance in the state
in order to determine whether such person has been or is engaged in any
unfair method of competition or in any unfair or deceptive act or practice
prohibited by the code. The powers vested in the commissioner in this
section of the code are in addition to any other powers to enforce any
penalties, fines or forfeitures, denials, suspensions or revocations of
licenses or certificates authorized by law with respect to the methods, acts
and practices herebv declared to be unfair or deceptive.

(i) Advertising insurance that the insurer will not sell. It is a

misdemeanor in which carries a fine of up to $10,000. This section does
not apply to an insurer which refuses to sell a policy on the basis of its
underwriting guidelines. This section does not apply to advertisements by
an insurer where the ads are broadcasted (TV, radio) and originate from
outside the state.

Cancellation, lapse, renewal, and non-renewal:

Cancellation is the termination of coverage by an insurer during a policy

period. It does not mean the termination of the contract at the request of the
policyholder.

Lapse refers to policy termination due to non-payment of the premium by

the policyholder. A policy will lapse at the end of the grace period, which is a period
of time after the premium due date, during which the policy remains in force without
penalty.

Renewal refers to continued coverage under the policy for an additional

period of time upon expiration of the current policy period.

Non-renewal refers to the giving of notice by the insurer to the policyholder

that the insurer is unwilling to renew a policy.

Life policies are incontestable after being in force for two years. After this
period of time, the insurer can cancel only for non-payment. Some term contracts
are written as renewable which means the policyholder has the right to renew
without proof of insurability, but premiums can be adjusted.

Disability contracts may be cancelled for non-payment and on the grounds

of fraud on the part of the insured. Disability contracts can be written as non-

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renewable/cancelable, optionally renewable, conditionally renewable, guaranteed
renewable, or non-cancelable.

of preexisting conditions unless they would have been excluded or reduced as

preexisting conditions under the prior group policy. (CIC 10128.3.b)

Insurance Information and Privacy Protection Act (IPPA): (CIC 791-791.26)

The purpose of this article is to establish standards for the collection, use, and
disclosure of information gathered in connection with insurance transactions by
insurance institutions, agents or insurance-support organizations; to maintain a
balance between the need for information by those conducting the business of
insurance and the public’s need for fairness in insurance information practices,
including the need to minimize intrusiveness; to establish a regulatory mechanism
to enable persons to ascertain what information is being or has been collected
about them in connection with insurance transactions and to have access to such
information for the purpose of verifying or disputing its accuracy; to limit the
disclosure of information collected in connection with insurance transactions; and
to enable insurance applicants and policyholders to obtain the reasons for any
adverse underwriting decision.

Notice of information practices: An insurance company or agent must

provide a notice of information practices to all applicants or policyholders (1) when
the policy is delivered if the only information to be used is collected from the
applicant, insured or public records or (2) at the time of application if personal
information will be collected from any source other than the applicant, insured or
public records.

The notice must be in writing and must state:

1. Whether personal information may be collected from persons other

than the applicant proposed for coverage.
2. The types of personal information that may be collected and the
types of sources and investigative techniques that may be used to
collect the information.
3. The circumstances under which the disclosures may be made
without prior authorization.
4. A description of the applicant’s rights and the manner in which
those rights may be exercised.
5. That information obtained from a report prepared by an insurance
support organization may be retained by the insurance support
organization and disclosed to other persons.

An acknowledgment that the company’s information practices have been

disclosed must be signed by the applicant and submitted with the application.
Further, an insurance institution or agent must clearly specify questions on an

Insurance Code 30
application designed to obtain information solely for marketing or research
purposes.

Disclosure authorizations are forms or statements with which a person

authorizes personal or confidential information about him to be disclosed. This
authorization must:

1. Be written in plain language.

2. Be dated.
3. Specify the types of persons authorized to disclose information (i.e.
friends, neighbors, employer).
4. Specify the nature of the information authorized to be disclosed
(habits, personal traits).
5. Name the insurance institution or agent to whom the individual
authorizes information to be disclosed.
6. Specify the purposes for which the information is collected (e.g. to
underwrite an application for insurance).
7. Specify the length of time for which the disclosure authorization is
valid. The maximum length of time for life, health or disability
insurance is 30 months and one year for property and casualty
insurance.
8. Advise the individual that he is entitled to receive a copy of the
authorization form.
9. This section shall not be construed to require any authorization for
the receipt of personal or privileged information about an individual.

Corrections in reports may be requested by individuals. An individual may

request that the information be corrected, amended, or deleted. The individual
must provide the facts to support the request. Within 30 days of receiving the
request, the insurance company, agent, or insurance support organization must
(1) correct, amend or delete the portion of record information in dispute or (2) notify
the individual that it will not make the alteration in the record, giving the reasons
for that refusal and notify the individual of his right to file a statement.

Penalties: The commissioner has the right to examine and investigate

every insurance organization or agent doing business in the state to determine if
the privacy laws have been violated. If the commissioner has reason to believe
that the law is being violated, he may serve notice and conduct a hearing into the
allegation. An insurance support organization transacting business outside of the
state, which has an effect on a person residing in California, is deemed to have
appointed the commissioner to accept service of process on its behalf, provided
that the commissioner sends a copy of the service by registered mail to the
insurance support organization.

After a hearing, the commissioner must put his findings in writing and can
issue a cease and desist order if he finds the law has been broken. If the person
violates the cease and desist order, the commissioner can impose a fine of up to

Insurance Code 31
$10,000 for each violation. If the violations occur with such frequency that they
clearly are a general business practice, the fine can be up to $50,000. If a
company or agent knew or should have known that the rules were being violated,
the commissioner also may suspend or revoke the company’s certificate of
authority or the agent’s license.

Any person who knowingly and willfully obtains information about an

individual from an insurance institution, agent, or insurance support organization
under false pretenses can be fined up to $10,000 or imprisoned for up to one year,
or both.

Gramm-Leach-Bliley Act: The Financial Modernization Act of 1999, know

as the “Gramm-Leach-Bliley Act” or GLB Act, has provisions to protect consumers’
personal financial information held by financial institutions. There are three main
parts to the privacy requirements. They are (1) the Financial Privacy Rule, (2)
Safeguard Rule, and (3) pretexting provisions.

The Financial Privacy Rule governs the collection and disclosure of

customers’ personal financial information by financial institutions and other
companies who receive such information. Customers are entitled to receive a
privacy notice every year. The notice must be given to the customers or
consumers by mail or in person. The privacy notice must be a clear, conspicuous,
and accurate statement of the company’s privacy practices. It should include what
information the company collects about its consumers or customers, with whom
the information is shared, and how it safeguards the information. The notice
applies to the “nonpublic personal information” the company gathers and discloses
about it customers and consumers. Customers and consumers have the right to
“opt out” of having their information shared with certain third parties. The GLB Act
does not give consumers the right to opt out when the financial institution shares
other information with its affiliates.

The Safeguards Rule requires all financial institutions to design, implement,

and maintain safeguards to protect customer information. This rule applies not
only to financial institutions that collect information from their own customers, but
it also applies to financial institutions such as credit reporting agencies that receive
customer information from other financial institutions.

The pretexting provision prohibits the practice of obtaining customer

information from financial institutions under false pretenses. A pretext interview is
an interview whereby a person, in an effort to get confidential information about
another person: (1) pretends to be someone he is not; (2) pretends to represent a
person he is not in fact representing; (3) misrepresents the true purpose of the
interview; or (4) refuses to identify himself upon request. Pretext interviews may
not be used by anyone engaged in the business of insurance except when
investigating claims where there is a reasonable basis for suspecting fraud,
criminal activity, material misrepresentation or non-disclosure.

Insurance Code 32
California Financial Information Privacy Act (SB1 or California Financial Code
4050): The intent of this act is to afford greater privacy protections than those
provided by the GLBA (Gramm-Leach-Bliley Act). It unites the federal GLBA with
the Insurance Information Privacy and Protection Act (IPPA) contained in the
insurance code. Enacted in 2003, Cal-GLBA’s biggest impact is the required
implementation of greater “opt-out/opt-in” choices with enhanced privacy
requirements. The following is a comparison of the California law (Cal-GLBA) and
the federal law (GLBA).
Provision Cal-GLBA GLBA

Selling or sharing information Opt-In Opt-Out

with outside company

Selling or sharing with affiliates Opt-Out No-Opt

and subsidiaries

Sharing between 2 financial Opt-Out No-Opt

institutions jointly offering a
financial product

Sharing to complete a transaction No-Opt No-Opt

Clear & readable consumer form? Yes No

Legend:
Opt-In=Company must receive consumer permission first.
Opt-Out=Consumers can stop sharing if they object.
No-Opt=Consumers cannot stop the sharing

Fiduciary responsibilities: (CIC 1733-1735) A fiduciary is a person who is in a

position of financial trust.

1. All funds received by a person who holds any kind of insurance license
as agent, broker, or solicitor are received and held by that person in a
fiduciary capacity (position of trust). Anyone who diverts or appropriates
fiduciary funds for his own use is guilty of theft, which is punishable under
criminal law.

Premiums advanced by a premium financer under terms of a finance

agreement are fiduciary funds only if they are received by a person who
holds a license.

2. A licensed person who receives fiduciary funds (a) must remit premiums,
minus commissions, and any return premiums received or held by him/her
to the insurer or entity entitled to get them or (b) must maintain the fiduciary
funds on California business in a trustee bank account or depository in
California separate from any other account, in an amount at least equal to

Insurance Code 33
 the premiums and return premiums, less commissions, received by him
which have not yet been paid to the persons entitled to them.

The person may commingle additional funds with fiduciary funds as he may
deem prudent for the purpose of advancing premiums, establishing
reserves to pay return commissions, or contingencies as may arise in his
business of receiving and transmitting premium or return premiums.

3. Fiduciary funds which have not yet been remitted and which are not held in
a trust account can be invested in the following instruments:

 U.S. government bonds and treasury certificates or other obligations

backed by the federal government.
 Certificates of deposit of banks and savings and loan associations
licensed by the federal government or any state government.
 Repurchase agreements collateralized by U.S. government
securities.

4. As a condition to maintaining the funds in one of the investment accounts,

a written agreement must be obtained from each and every insurer or
person entitled to the funds authorizing the maintenance and retention of
earnings which accrue on the funds.

5. Evidence of the funds must be maintained on California business by a

bank or savings and loan association in a trust account separate from any
other account or depository in an amount at least equal to the premiums
and return premiums, minus commissions, which have not yet been paid
to the insurer or entity entitled to them. The commissioner shall not have
jurisdiction over any disputes arising between parties concerning the
maintenance of fiduciary funds.

6. A managing general agent must comply with all regulations concerning

deposit, maintenance, and remittance of fiduciary funds. A managing
general agent is a licensed property and casualty broker/agent or life-only
and/or accident and health agent who has a written contract with one or
more admitted insurers to manage the production of its business in a
designated territory in California. A managing general agent:
 Hires, supervises, and fire agents.
 Accepts or declines risks.
 Collects premiums from producing broker/agents and remits them to
insurers under an account current system.
7. A property and casualty broker/agent, personal lines broker/agent,
or surplus lines broker can deduct any return premiums due an insured
from unpaid premiums the insured owes on the same or any other policy.
An insurer may pay return premiums to a property broker-agent and/or
casualty broker-agent for this purpose.

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 Fraudulent claims: It is against the law for a person to knowingly:

 Present a false or fraudulent claim for payment of a loss.

 Present multiple claims for the same loss or injury, including claims to more
than one insurer, with intent to defraud.
 Cause or participate in a vehicle collision or other vehicular accident.
 Present a false or fraudulent claim for a loss due to theft, destruction,
damage, or conversion of a motor vehicle, motor vehicle part, or motor
vehicle contents.
 Prepare, make or subscribe any writing to support a false or fraudulent
claim.
 Assist, abet, solicit, or conspire with any person who knowingly commits
any of these violations.
 Make a false or fraudulent claim for payment of a health care benefit.
 Submit a claim for a health care benefit which was not used by the claimant.
 Present multiple claims for payment of the same health care benefit with
intent to defraud.
 Present for payment any undercharges for health care benefits on behalf of
a claimant unless known overcharges for health care benefits for that
claimant are presented for reconciliation at the same time. (CIC 1871.4)

A violator can be imprisoned for up to one year in county jail, or 2, 3, or 5 years

in state prison and/or be fined up to $150,000 or double the value of the fraud,
whichever is greater, or by both imprisonment and fine. If the violator has a prior
felony conviction for the same offense, there shall be an additional two year
sentence for each previous conviction. Additional criminal charges also may be
imposed.
An insurer’s claim form must carry the statement: “For your protection,
California law requires the following to appear on this form” (or similar wording)
followed by “A person who knowingly presents a false or fraudulent claim for the
payment of a loss is guilty of a crime and may be subject to fines and confinement
in state prison”. (CIC 1871.2) The person may be found guilty of perjury.

The California legislature is aware that the business of insurance involves many
transactions that have potential for abuse and illegal activities. Many law
enforcement agencies at the state and local levels are responsible for investigating
and prosecuting fraudulent activities. Every insurer admitted to do business in this
state shall maintain a unit or division to investigate possible fraudulent claims by
insureds or by persons making claims for services or repairs against policies held
by insureds (CIC 1875.20) Insurers and their agents shall have access to all
relevant public records that are required to be open for inspection when they are
investigating suspected fraudulent claims. (1871.1)

Fraudulent claims harm everyone as they add to an insurer’s overall claims

experience. This might skew the actuarial projections of the insurer. To make up
for these losses, an insurer will need to increase premiums which is an expense
that will be borne by all policyholders. (CIC 1871)

Insurance Code 35
 There is a Bureau of Fraudulent Claims within the Department of Insurance. It
was created to enforce the provisions prohibiting fraudulent claims and to enforce
related sections of the Penal Code. (CIC 1872) To help prevent fraud, there is the
National Automobile Theft Bureau. Every insurer is required to report private
passenger automobiles involved in theft and salvage total losses. (CIC 1874.6)

Before settling a claim involving vehicle theft, the insurer shall secure a claim
form from the insured that includes a warning that false representations on the
form subjects the insured to the penalty of perjury, a detailed description of the
insured vehicle, the purchase location of the insured vehicle, purchase date and
name of seller, a detailed statement of the circumstances surrounding the theft,
and the insured’s current driver’s license number. The insured must sign the claim
form in the presence of the insurance agent, broker, or adjuster, or other claims
representative who must verify the insured’s driver’s license number, or submit a
notarized claim form, and the claim form shall be signed under penalty of perjury.
The insurer must retain for three years all settlement checks in settling an auto
theft, the original claim form, and a legible copy of the police report. (1871.3)

The Arson Information Reporting System permits insurers, law enforcement

agencies, fire investigative agencies, and district attorneys to deposit arson case
information in a common database within the Department of Justice. The purpose
of this database is to identify utilization patterns by individual claimants and
methods of operation of individuals, groups, or businesses engaged in the
commission of arson and to prevent the perpetration of insurance fraud by arson.
(CIC 1875.8)

When an insurer knows or reasonably believes it knows the identity of a person

whom it has reason to think committed a fraudulent act relating to a worker’s
compensation insurance claim and believes it has not been reported to an
authorized governmental agency, the insurer or its agent shall notify the local
district attorney’s office and the Bureau of Fraudulent Claims of the Department of
Insurance. The insurer must state in its notice the basis of its knowledge or
reasonable belief. (CIC 1877.3(b)(1)

The commissioner may license an organization as an insurance claims analysis

bureau provided it meets the necessary requirements. The commissioner shall
license an insurance claims analysis bureau by class of claims for the following
classes of insurance:

 Automobile bodily injury

 Automobile physical damage
 Automobile theft
 Fire and allied lines property damage
 General liability bodily injury
 Disability
 Life

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  Workers’ compensation (CIC 1875.13)

An insurance claims analysis bureau shall perform the following functions:

 Collect and compile information and data from members or subscribers

concerning insurance claims.
 Disseminate information to members or subscribers relating to insurance
claims for the purpose of preventing and suppressing insurance fraud.
 Promote training and education to further insurer investigation,
suppression, and prosecution of insurance fraud.
 Provide, without a fee or charge, to the commissioner, all California data
and information contained in the records of the insurance claims analysis
bureau in furtherance of the prevention and prosecution of insurance fraud.
(CIC 1875.14)

Every insurer admitted to do business in this state shall maintain a unit or

division to investigate possible fraudulent claims by insureds or by persons
making claims for services or repairs against policies held by insureds. (CIC
1875.20)

Civil liability: (1872.5) No insurer or the insurer’s employees, or agents, can be

sued for libel, slander, or any other relevant cause of tort action for providing,
without malice, any of the following:

 Any information or reports relating to suspected fraudulent insurance

transaction furnished to law enforcement officials or licensing officials
governed by the Business and Professions Code.
 Any reports or information relating to suspected fraudulent insurance
transactions furnished to other persons subject to this ruling.
 Any information or reports required by the code or the commissioner under
the authority granted by the code.

File and Record Documentation: (Title 10, CCR 2695.3)

Every licensee’s claim files shall be subject to examination by the

commissioner. These files shall contain all documents, notes and work papers
(including copies of all correspondence) that reasonably pertain to each claim in
such detail that pertinent events and the dates of the events can be reconstructed
and the licensee’s actions pertaining to the claim can be determined.

To assist in such examination all insurers shall:

1. Maintain claim data that are accessible, legible and retrievable for
examination so that an insurer shall be able to provide the claim number, line of
coverage, date of loss and date of payment of claim, date of acceptance, denial or
date closed without payment. This data must be available for all open and closed
files for the current year and the four preceding years.

Insurance Code 37
 2. Record in the file the date the licensee received, date(s) the licensee
processed and date the licensee transmitted or mailed every material and relevant
document in the file.

3. Maintain hard copy files or maintain claim files that are accessible,
legible and capable of duplication to hard copy; files shall be maintained for the
current year and the preceding four years.

The requirements of this section shall be satisfied where the licensee provides
documentation evidencing inability to obtain data, non-existence of data, or
difficulty in obtaining clear documentary support for actions due to catastrophic
losses, or other unusual circumstances providing the licensee establishes to the
satisfaction of the commissioner that the circumstances alleged by the licensee do
exist and have materially affected the licensee’s ability to comply with this
regulation. Any licensee that alleges an inability to comply with this section shall
establish and submit to the commissioner a plan for file and record documentation
to be used by such licensee while the circumstances alleged to preclude
compliance with these rules continue to exist.

Duties upon Receipt of Communications: (Title 10. CCR 2695.5)

Upon receiving any written or oral inquiry from the Department of Insurance
concerning a claim, every licensee shall immediately, but in no event more than
21 calendar day of receipt of that inquiry, furnish the Department of Insurance with
a complete written response based on the facts known by the licensee. The
response is to address all inquiries made by the Department of Insurance and
include copies of any documentation and claim files requested.

When a licensee receives any communication from a claimant where a

response is expected, the licensee shall immediately, but in no event more than
15 calendar days, furnish the claimant with a complete response based on the
facts known by the licensee.

The person authorized to represent the claimant shall be stated in writing

and signed and dated by the claimant. A claimant may revoke such a designation
by writing the insurer to this effect.

Upon receiving notice of claim, every licensee or claims agent shall

immediately transmit notice of claim to the insurer. Upon receipt of notice of claim,
every insurer shall immediately, but in no event more than 15 calendar days later,
(1) acknowledge receipt of such notice of claim unless payment has already been
made; (2) provide to the claimant necessary forms, instructions, and reasonable
assistance; and (3) begin any necessary investigation of the claim. An insurer
cannot require that the notice of claim be provided in writing unless such
requirement is specified in the insurance policy or an endorsement. If the
acknowledgement is not in writing, a notation of acknowledgement shall be made
in the insurer’s claim file and dated.

Insurance Code 38
Fair Claims Settlement Practices Regulations:

Definitions:

Claimant: Any person who asserts a right of recovery under a surety bond,
an attorney, any person authorized by operation of law to represent the
claimant, or any of the following persons properly designated by the
claimant: an insurance adjuster, a public adjuster, or any member of the
claimant’s family. (Title 10, CCR 2695.2(c)

Notice of Legal Action: Notice of an action commenced against the

insurer with respect to a claim, or notice of action against the insured
received by the insurer, or notice of action against the principal under a
bond, and includes any arbitration proceeding. (Title 10, CCR 2695.2(o)

Proof of Claim: Any documentation in the claimant’s possession submitted

to the insurer that provides any evidence of the claim and that supports the
magnitude or the amount of the claimed loss. (Title 10, CCR 2695.2(s)

Standards for Prompt, Fair and Equitable Settlements: (Title 10, CCR 2695.7)
No insurer shall discriminate in its claims settlement practices based
upon the claimant’s age, race, gender, income, religion, language, sexual
orientation, ancestry, national origin, or physical disability, or upon the territory of
the property or person insured. (Title 10, CCR 2695.7(a) Upon receiving proof of
claim every insurer shall immediately, but in no event more than 40 calendar days
later, accept or deny the claim, in whole or in part. The amounts accepted or
denied shall be clearly documented in the claim file unless the claim has been
denied in its entirety. This time frame does not apply to disability insurance,
disability income insurance, mortgage guaranty insurance, or automobile repair
bills arising from collision and comprehensive claims. (Title 10, CCR 2695.7(b)

When an insurer denies or rejects an insured’s claim, in whole or in

part, it must do so in writing and contain the basis for such rejection or denial. If a
claimant believes that a claim has been wrongfully denied or rejected, he/she may
have the matter reviewed by the California Department of Insurance and the
insurer must inform the claimant of this fact as well as providing address and
telephone of the unit of the Department that reviews claim practices.

If more time is required than the allotted 40 days to determine

whether a claim should be accepted or denied, every insurer shall provide the
claimant with written notice of the need for additional time. This written notice shall
specify any additional information the insurer requires in order to make a
determination and state any continuing reasons for the insurer’s inability to make
a determination. Thereafter, the written notice shall be provided every 30 calendar
days until a determination is made or notice of legal action is served. If the
determination cannot be made until some future event occurs, then the insurer

Insurance Code 39
shall comply with this continuing notice requirement by advising the claimant of the
situation and providing an estimate as to when the determination can be made.
An insurer does have to disclose any information that could reasonably be
expected to alert a claimant to the fact that the claim is being investigated as a
possible suspected fraudulent claim. (Title 10, CCR 2695.7(c)

No insurer shall attempt to settle a claim by making a settlement offer

that is unreasonably low. The commissioner shall consider any admissible
evidence offered regarding the following factors in determining whether or not a
settlement offer is unreasonably low:
1. The extent to which the insurer considered evidence submitted by the
claimant to support the value of the claim.
2. The extent to which the insurer considered legal authority or evidence
made known to it or reasonably available.
3. The extent to which the insurer considered the advice of its claims
adjuster as to the amount of damages.
4. The extent to which the insurer considered the advice of its counsel that
there was a substantial likelihood of recovery in excess of policy limits.
5. The procedures used by the insurer in determining the dollar amount of
property damage.
6. The extent to which the insurer considered the probable liability of the
insured and the likely jury verdict or other final determination of the
matter.
7. Any other credible evidence presented to the commissioner that
demonstrates that the final amount offered is below the amount that a
reasonable person with knowledge of the facts and circumstances
would have offered in settlement of the claim. (Title 10, CCR 2695.7(g)

Upon acceptance of the claim in whole or in part and, when

necessary, upon receipt of a properly executed release, every insurer shall
immediately, but in no event more then 30 calendar days later, tender payment or
otherwise take action to perform its claim obligation. In claims where multiple
coverage is involved, and where the payee is known, amounts that have been
accepted by the insurer shall be paid immediately, but in no event more the 30
calendar days, if payment would terminate the insurer’s known liability under that
individual coverage, unless impairment of the insured’s interests would result.
These time frames do not apply to disability insurance, disability income insurance,
mortgage guaranty insurance, automobile repair bills arising from collision and
comprehensive insurance, and title insurance. (Title 10, CCR 2695.7(h) No
insurer shall inform a claimant that his/her right may be lost if a form or release is
not completed within a specified time period unless the information is given to
advise the claimant of any applicable statute of limitations or policy provision or the
time limitation within which claims are required to be brought against state or local
entities.

Insurance Code 40
 No insurer shall require that a claimant withdraw, rescind or refrain from
submitting any complaint to the Department of Insurance regarding the handling
of a claim as a condition to the settlement of any claim.

ERRORS AND OMISSIONS INSURANCE

Insurance agents can be held legally liable for the consequences of any
errors or omissions they have made while conducting their business. For this
reason, insurance agents need to carry professional liability insurance which is
called errors and omissions insurance (E&O). E&O insurance provides coverage
for an act, error, or omission the agent makes in rendering or failing to render
professional services in the conduct of his/her insurance profession.

E&O insurance does not offer protection from intentional acts, criminal acts,
liability assumed under contract, or bodily and personal injury. Apart from this,
E&O policies have few exclusions. Although there is no standard E&O policy,
there are certain characteristics that they do have. These policies normally have
high deductibles—usually $1,000 or more. Coverage normally is written on a limit
per claim basis, but aggregate limits for all claims during the policy period are
available. Limits of coverage commonly range from $100,000 to several million
dollars.

The insurance company providing E&O coverage will provide a defense for
the agent even if the charge is frivolous.

SOLVENCY Definitions:

Insolvency means any impairment of minimum “paid-in capital” required of

an insurer for the class(es) of insurance which it transacts. An insurer cannot
escape the condition of insolvency by being able to provide for all its liabilities and
for reinsurance of all outstanding risks. An insurer must also be possessed of
additional assets equivalent to such aggregate “paid-in capital” required by the
code after making provision for all such liabilities and for such reinsurance. (CIC
985)

Paid-in capital is capital received from investors in exchange for stock as

distinguished from capital generated from earnings or donated. According to the
code, a foreign mutual insurer must have the value of its assets in excess of the
sum of its liabilities for losses reported, expenses, taxes, and all other
indebtedness and reinsurance of outstanding risks plus its paid-in capital must be
composed of available cash assets amounting to at least $200,000. In the case of
other insurers, they must possess the lower of the following amounts:

Insurance Code 41
 (1) The value of its assets in excess of the sum of its liabilities for
losses reported, expenses, taxes, and all other indebtedness and reinsurance of
outstanding risks.
(2) The aggregate par value of its issued shares of stock, including
treasury shares. (CIC 36)

Conservation means the commissioner thinks an insurer can be saved

from insolvency. The commissioner may apply to the superior court of the county
in which the insurer has its principal office and become the conservator of the
business. The commissioner will take over the insurer’s assets, property, books,
records, and run the business. The following are grounds for the commissioner to
take over an insurer:

a. The company has refused to submit books, papers, or accounts to

the commissioner for inspection.
b. The company has neglected or refused a commissioner’s order to
make good any deficiency in its capital (stock company) or reserve
(mutual company).
c. Without getting the commissioner’s written consent, the company
transfers or tries to transfer all its property or business to another
person or consolidates its property and assets with another
business.
d. After an examination by the commissioner, the company is found to
be in such bad financial condition that continuing to conduct its
business is hazardous to the public, creditors, or policyholders.
e. The business entity has violated its charter or state law.
f. Any officer of the business refuses to be examined under oath about
the company’s affairs.
g. An officer or attorney in fact has wrongfully diverted or embezzled
any of the company’s assets.
h. A domestic insurer does not comply with the state’s requirements for
a certificate of authority or that the company’s certificate has been
revoke.
i. The insurer was found to be insolvent at its last examination by the
insurance department. (CIC 1011)

Whenever the above conditions exist or it appears that irreparable loss

and injury to property or business may occur, the commissioner, without notice and
before applying to the court for any order, shall take possession of the property,
business, books, records and accounts and of the offices and premises occupied
for the transaction of business and retain possession subject to the order of the
court. Any person having possession of and refusing to deliver any of the books,
records or assets of a person against whom a seizure order has been issued, shall
be guilty of a misdemeanor and punishable by fine not exceeding one thousand
dollars or imprisonment not exceeding one year, or both such fine and
imprisonment. (CIC 1013)

Insurance Code 42
 Liquidation means the commissioner feels it would be futile to proceed as
conservator of the insurer and applies to the court for an order to liquidate and
wind up the business of the insurer. (CIC 1016)

California Life and Health Insurance Guarantee Association (CIC 1067-

1067.18)

The purpose of the California Life and Health Insurance Guarantee

Association is to protect policyowners, insureds, and beneficiaries against loss
when a member company is financially impaired and cannot pay its contractual
obligations under life insurance, health insurance, and annuity contracts. To
provide this protection, an association of insurers is created to pay benefits and
members of the association are subject to assessment to provide funds. (CIC
1067.01) All admitted life and health insurers are obligated to join this association.
The association is managed by a board of directors and shall consist of not less
than 9 nor more than 13 member insurers. The members of the board shall be
selected by member insurers and approved by the commissioner. (CIC 1067.06)

The protection of the association extends to persons who are owners of

policies or certificate holders and who are residents of this state. The association
also provides coverage to nonresidents if all of the following conditions are met:
(1) the insurer that issued the policy is domiciled in this state; (2) the insurer never
held a license or Certificate of Authority in the state in which the person resides;
(3) the state in which the person resides has an association similar to the
association that exists in California; and (4) the person is not eligible for coverage
by the association in the state of residence. (CIC 1067.02(a)(1)

If an impaired member is a domestic company, the association may do one

of the following after receiving the commissioner’s approval:

1. Guarantee, assume or reinsure the impaired company’s policies or

contracts.
2. Provide monies, pledges, notes, guarantees or other means to
ensure payment of an impaired insurer’s obligations.
3. Loan money to the impaired company.

To provide funds to run the association, the association may assess the
member insurers for the necessary amounts. If an insurer does not pay the
assessment when due, it is subject to having its certificate of authority suspended
or revoked by the commissioner.

The contracts covered by the guarantee association are direct, non-group

life, health, annuity, and supplemental policies or contracts and certificates under
direct group life, health, annuity, and supplemental policies and contracts. (CIC
1067.02(b)(1) Coverage is not provided for:
 Any portion of a policy or contract not guaranteed by the insurer, or under
which the risk is borne by the policyholder.

Insurance Code 43
  Any policy or contract of reinsurance, unless assumption certificates have
been issued.
 Any portion of a policy or contract to the extent that the rate of interest on
which it is based exceeds statutory limitations.
 Guaranteed investment contracts, guaranteed interest contracts, funding
agreements, deposit administration contracts, and all other unallocated
annuity contracts.
 Any plan or program of an employer, association, or similar entity to provide
life, health, or annuity benefits to its employees or members to the extent
that the plan or program is self-funded or uninsured.
 Any portion of a policy or contract to the extent that it provides dividends or
experience rating credits, or provides that any fees or allowances be paid
to any person, including the policyholder, in connection with the service to
or administration of the policy or contract.
 Any policy or contract issued in this state by a member insurer at a time
when it was not licensed or did not have a Certificate of Authority to issue
the policy or contract in the state.
 Any annuity issued by a charitable organization that is duly qualified as such
under applicable provisions of the Internal Revenue Code, and that is not
engaged in the business of insurance as its primary business. (CIC
1067.02(b)(2)
The benefits that the association may be liable to pay for any one life may
not exceed the lesser of:

1. 80% of contractual obligations (subject to certain limitations);

2. $250,000 in life insurance death benefits, but no more than $100,000
in net cash surrender value for life insurance;
3. $100,000 in the present value of annuity benefits, including net cash
surrender values.

There is a maximum aggregate amount of $250,000 with respect to any one

individual for which the association will assume liability.

With respect to any one owner of multiple policies of individual life

insurance, whether the policy owner is an individual, firm, corporation, or other
legal entity, and whether the persons insured are officers, employees, or other
persons in whose lives the policy owner has an insurable interest, the maximum
benefit is $5,000,000 regardless of the number of the policies and contracts held
by the owner.

The health insurance benefits for which the association may become liable
shall in no event exceed the lesser of the following:
1. The contractual obligations for which the insurer is liable
or for which the insurer would have been liable if it were
not impaired or insolvent.
2. With respect to any one individual, regardless of the
number of contracts, $200,000 in health insurance

Insurance Code 44
 benefits. This amount shall increase or decrease based
upon changes in the health care cost component of the
consumer price index from January 1, 1991 to the date on
which the insurer becomes insolvent.

California Insurance Guarantee Association

Insurers selling fire, marine, plate glass, liability, workers’ compensation,

common carrier liability, boiler and machinery, burglary, sprinkler, team and
vehicle, automobile, aircraft and miscellaneous insurance in California must
belong to the California Insurance Guarantee Association. This includes nearly all
types of property and casualty insurance except the ocean marine portion of
marine insurance, reinsurance, or fraternal fire insurance. (CIC 1063)

The purpose of the association is to protect the interests of policyholders

and beneficiaries against loss because an insolvent insurer is unable to pays its
contractual obligations under property and casualty insurance policies. The
association is managed by a board of nine member insurers who are appointed by
the commissioner. If a company becomes insolvent, each member company is
assessed money on a percentage basis to pay contractual obligations of the
insolvent insurer and necessary administrative expenses. The percentage for any
one company is determined by dividing the company’s premiums from that line of
business in California by all premiums for that line of business in the state.

Covered claims (except in the case of workers’ compensation claims) do

not include claims of $100 or less, nor the first $100 of any claim that exceeds
$100, nor the part of any claim that exceeds $500,000 or the policy limit of the
contract.

DISCRIMINATORY PRACTICES

Certain property and liability insurance: (CIC 679.70) The prohibitions

regarding discrimination apply to policies in California other than automobile and
worker’s compensation. They include insurance against loss or damage to
residential real and personal property and coverage for the legal liability of a
natural person. Most of these provisions also apply to life and disability insurance.

Failure or refusal to accept application: (CIC 679.71) Unless the insurance will
be issued by another insurer under the same management and control, an
insurance company cannot refuse to accept an application, issue a policy, or
cancel a policy because of a person’s marital status, sex, race, color, religion,
national origin, or ancestry. An insurer may not charge a higher premium for
insurance because of any of these reasons.

Application or report carrying identification: (CIC 10141-10142) An application

or investigative report furnished by an insurer to its agents or employees in the
course of determining an applicant’s insurability, cannot carry any identification as

Insurance Code 45
to the applicant’s race, color, religion, national origin, or ancestry. If it is used only
to identify the applicant and not as a basis for discrimination, the insurer may ask
where an applicant was born.

Practices based on race or color: A licensed insurer may not refuse to accept
an application, issue, or cancel insurance or charge a higher premium because of
a person’s race, color, religion, national origin, ancestry, or sexual orientation. In
underwriting life and disability insurance, an insurer may not consider an
applicant’s sexual orientation or use marital status, living arrangements,
occupation, gender, beneficiary designation, or zip codes to establish an
applicant’s sexual orientation or to decide if the applicant should be tested for HIV
antibodies. The penalty for knowingly violating this provision can be a fine of
$1,000 up to $5,000 plus court costs. (CIC 10140)

The insurance code requires strict confidentiality of personal information

obtained through HIV testing and requires informed consent before any insurer
tests for HIV. (CIC 799)

Genetic disability traits: (CIC 10143) An insurer may not refuse to issue, sell,
or renew a life or disability policy solely because the person to be insured carries
a gene which may cause a disability in the insured’s children but which causes no
ill effects to the carrier. Examples include sickle cell, Tay-Sachs, and X-linked
hemophilia. An insurer may not charge an applicant a higher premium (individual
or group) due to a person to be insured having these traits.

An insurer may not insert a condition or stipulation in a policy that the

insured person with such a trait, his/her heirs, or beneficiaries must accept less
than the full value of the policy in event of a claim. An insurer may not pay a lower
commission to an agent or broker for selling or renewing life or disability policies
on persons possessing these traits.

Physically or mentally impaired: (CIC 10144) An insurer who issues individual

or group life, annuity, or disability policies may not refuse to insure, continue to
insure, limit the amount or kind of coverage available, or charge a higher premium
for the same coverage to a physically or mentally impaired person except where
the refusal, limitation, or rate differential is based on sound actuarial principles or
is related to actual and reasonably anticipated experience.

Physical or mental impairment means any physical, sensory, or mental

impairment that substantially limits one or more of that person’s major life activities.

Blindness or partial blindness: (CIC 10145) An insurer who issues individual or

group life, annuity, or disability policies may not refuse to insure, continue to insure,
limit the amount or kind of coverage available, or charge a higher premium for the
same coverage because an applicant is blind or partially blind.

Insurance Code 46
Special Concerns—Senior citizens

All insurers and licensees owe a prospective insured who is 65 years

of age or older, a duty of honesty, good faith, and fair dealing.

Pretext Interviews

Pretext interviews are illegal. A pretext interview is when the interviewer

does not reveal his true identity, pretends to be someone who he is not, or
misrepresents the true purpose of the interview. The insurance industry does not
want unscrupulous agents preying on senior citizens by selling them unnecessary
policies or policies that are over-priced.

Pretext interviews are legal when conducted by insurance adjusters when

there is sufficient evidence of fraud or material misrepresentation. (CIC 791.03)

Post Claims Underwriting

No insurer issuing or providing any policy of disability insurance covering

hospital, medical, or surgical expenses shall engage in the practice of post claims
underwriting. Post claims underwriting means the rescinding, canceling, or limiting
of a policy or certificate due to the insurer’s failure to complete medical
underwriting and resolve all reasonable questions arising from written information
submitted on or with an application before issuing the policy or certificate. (CIC
10384)

Insurers cannot legally refuse to pay a claim which is not excluded by the
contract. As long as the applicant for insurance answered all questions on the
application form truthfully, the insurer must cover the claim. Of course, if the
applicant lied or concealed material information, the insurer would have the right
to refuse coverage or to rescind the policy.

The applications for Medicare supplement insurance and long-term care

insurance contain questions to elicit information concerning the applicant’s health
status. This is to make sure that there is not a problem in the future regarding
his/her coverage.

Agency Law

Applications: This is the document in which an applicant answers questions and

facts with regards to the insurance they are wishing to acquire. The insurer will
use the information on the application to decide whether or not to accept the
applicant

Insurance Code 47
Binders: Sometimes referred to as “covering notes”, these provide temporary
insurance pending issuance of the insurance contract. A binder includes all the
usual policy terms and endorsements and expires when the policy is issued.

A binder shall be deemed an insurance policy for the purpose of proving that the
insured has the insurance coverage specified in the binder. "Binder" means a
writing which includes the name and address of the insured and any additional
named insureds, mortgagees, or lienholders, a description of the property
insured, if applicable, a description of the nature and amount of coverage and
any special exclusions not contained in a standard policy, the identity of the
insurer and the agent executing the binder, the effective date of coverage, the
binder number or the policy number where applicable to a policy extension. This
temporarily obligates the insurer to provide that insurance coverage pending
issuance of the insurance policy.

"Binder" does not include, and this section does not apply to life or disability
insurance or insurance in the amount of one million dollars ($1,000,000) or more.

A binder shall be valid for the period specified therein not exceeding 90 days
from the date of execution of the binder or, if not specified, for that period of 90
days. No binder shall remain valid on or after the date the insurance policy is
issued with respect to which the binder was given. Expiration of coverage under
a binder shall not be considered a cancellation or nonrenewal of a policy. (CIC
382.5)

Certificate of Liability Insurance: In liability coverage, a certificate of insurance

shows that the individual or business has insurance coverage currently in force.
In property and casualty policies, certificates of insurance are issued as evidence
of property insurance to a third party as proof that the insured has coverage.

Renewal Responsibilities: The insurance company, instead of the agent or

broker, generally handles policy renewals and cancellation notices. Even so, the
agent or Broker should follow-up to make sure the client does not need to make
some changes to their policy and that the renewals are issued
Suspense/Diary System: The suspense/diary system is the agent’s record
keeping system for tracking client transactions and communication. The
California Department of Insurance determines specifics regarding type of
information to maintain and length of time the information must be maintained on
site.

Lost Policy Release (LPR): A lost policy release is an agreement, signed by the
policyholder that relieves the insurer from liability under an insurance contract
that has been lost, misplaced, or is otherwise unavailable. The lost policy release
form is used to fulfill the requirement that a policy be returned when the insured
requests that coverage be cancelled.

Insurance Code 48
CIC 703.5: Any person, including, but not limited to, persons licensed or
certificated under this code or exempted from regulation under this code, who as
a part of any business advertises as, or holds himself or herself out as, qualified
to advise the public concerning insurance or qualified to administer workers'
compensation for employers and who in connection with or as part of that
business also, with or without consideration, (a) suggests or recommends to an
employer, or advises an employer, that the employer purchase aggregate excess
or aggregate stop-loss workers' compensation insurance, or (b) names or
suggests to an employer, or advises an employer of, a nonadmitted insurer from
whom aggregate excess or aggregate stop-loss workers' compensation
insurance might be purchased, is guilty of a misdemeanor. This section does not
apply if the employer is a self-insured public entity, including any agency, board,
or commission provided for by a joint exercise of powers agreement, or those
who have been issued a certificate by the Director of the Department of Industrial
Relations to self-insure.

Insurance in Connection with Sales and Loans

No person engaged in the business of financing the purchase of real or personal
property or of lending money on the security of real or personal property and no
trustee, director, officer, agent or other employee, or affiliate of, any such person
shall require, as a condition precedent to financing the purchase of such property
or to loaning money upon the security thereof, or as a condition prerequisite for
the renewal or extension of any such loan or for the performance of any other act
in connection therewith, that the person for whom such purchase is to be
financed or to whom the money is to be loaned or for whom such extension,
renewal or other act is to be granted or performed negotiate any insurance or
renewal thereof covering such property through a particular insurance agent or
broker. (CIC 770)

No person making a loan of money on the security of real property shall use or
make available to any person information contained in a policy of fire or casualty
insurance for the purpose of soliciting either type of insurance coverage if the
borrower has filed with the lender a statement signed by the borrower that the
policy information shall not be so used or made available. The statement may be
included by the borrower in his or her letter of authorization designating an
insurance agent or broker to the lender. The statement or letter of authorization
shall be effective until superseded or revoked by the borrower. (CIC 770.1)

The commissioner may suspend or revoke any license held by any person who
violates this section (CIC 773)

The commissioner, after hearing upon notice, may issue a cease and desist
order to any person if he finds that such person has, in more than one
transaction, violated this section. The violation of such a cease and desist order
is a misdemeanor. (CIC 774)

Insurance Code 49
Free Insurance
No insurer shall participate in any plan to offer or effect any kind or kinds of
insurance or annuities in this state as an inducement to the purchase or rental by
the public of any property, real or personal or mixed, or services, without any
separate charge to the insured for such insurance, nor shall any agent, broker, or
solicitor arrange the sale of any such insurance.

Agency Names
Every individual and organization licensee and every applicant for such a license
shall file with the commissioner in writing the true name of the individual or
organization and also all fictitious names under which he conducts or intends to
conduct his business and after licensing shall file with the commissioner any
change in or discontinuance of such names. The commissioner may in writing
disapprove the use of any true or fictitious name (other than the bona fide natural
name of an individual) by any licensee on any of the following grounds: (CIC
1724.5)

(a) Such name is an interference with or is too similar to a name already

filed and in use by another licensee;
(b) The use of the name may mislead the public in any respect;
(c) The name states, infers or implies that the licensee is an insurer,
motor club, hospital service plan or entitled to engage in insurance
activities not permitted under licenses held or applied for;
(d) The name states or implies that the licensee is an underwriter. This
subdivision shall not prevent a natural person who is a life licensee from
describing himself as an "underwriter" or from using the designation
"Chartered Life Underwriter" if entitled thereto nor shall it prevent a
natural person who is a property broker-agent and/or casualty broker-
agent licensee from using the designation "Chartered Property and
Casualty Underwriter" if entitled thereto nor a producers trade
association each member of which is also separately licensed from
having a name containing the word underwriter; or
(e) The licensee has already filed and not discontinued the use of more
than two names including the true name. This subdivision shall not
prevent a licensee who has lawfully purchased or succeeded to the
business or businesses of other licensees from using for each such
business not more than two additional names, true or fictitious,
consisting of names used by his predecessors in the conduct of such
businesses.

A licensee may not use a true or fictitious name after being notified by the
commissioner in writing that such use is contrary to this section. If the
commissioner determines that there are facts in mitigation in connection with the
continued use of such name he may permit its use for a specified reasonable
period of time. Any such permission and any such conditions shall be written.

Insurance Code 50
A property broker-agent and/or casualty broker-agent or life agent who has a
service contract with a corporation licensed under this code or who is a
stockholder or member of any incorporated association or corporation organized
under the Corporations Code for the purpose of providing services to property
broker-agent and/or casualty broker-agent or life agents may use the name of
such a corporation or association on any stationery or advertisements and other
written or printed matter used
to identify the business of the property broker-agent and/or casualty broker-agent
or life agent provided that the name of the property broker-agent and/or casualty
broker-agent or life agent is clearly identified as bearing only that relationship to
the corporation or association in one of the following ways:

"Representing ____;"
"A stockholder of ____;"
"Placing business through ____;"
"Using services of ____."

The use of the corporation or association name in the manner provided in this
section shall not constitute such use as would mislead the public. (CIC 1729.5)

Displaying of Insurance License

Every license to act as a property broker-agent and/or casualty broker-agent
shall be prominently displayed by the holder thereof in his or her office in a
manner whereby anyone may readily inspect it and ascertain both its currency
and the capacity in which its holder is licensed to act. (CIC 1725)

Records
The commissioner shall, after notice and hearing, promulgate reasonable rules
and regulations specifying the manner and type of records to be maintained by
those licensees acting as insurance agents and brokers and the location where
the records shall be kept. Those records shall be open to inspection or
examination by the commissioner at all times, and the commissioner may at any
time require the licensee to furnish any information maintained or required to be
maintained in those records.

Every licensee acting as an insurance agent and broker shall keep the records
as required by the regulations.

Every licensee acting as an insurance agent and broker employing a licensee in

the capacity of an insurance solicitor shall keep the records required by the
regulations promulgated pursuant to subdivision (a) for any insurance transacted
by the insurance solicitor in the capacity of employee of the employing licensee.
(CIC 1727[a-c])

Insurance Code 51
Life and Disability Records
It is the obligation of every insurer admitted in this state to transact life or
disability insurance, or both, to maintain certain records specified in this article
pertaining to the activities of its life, life and disability, and disability agents and
any other agents for the inspection and examination of the commissioner. The
original or certified copies of the records shall be delivered to the commissioner
within a period of 30 days following receipt of written demand. The records
required to be maintained or made available in this state may be in the form of
originals, carbon, faxed copies, microfilm copies, or electronic data-processing
records if printouts are available within a reasonable period of time, and shall
include the names, dates, amounts and policy numbers involved. The records
are composed of all of the following: (CIC 10508)
(1) The original application for each insurance policy or contract sold in
this state.
(2) Records showing, for each insurance policy or contract issued, the
premiums received by the insurer.
(3) Production records showing all insurance policies or contracts sold
by each agent or other agent in the expired portion of the current
calendar year and the whole of each of the preceding five calendar
years.
(4) Records showing, for each insurance policy or contract issued, the
amount of commissions paid and to whom.
(5) Records or memoranda identifying any agent other, than the agent
whose name appears on the application who, to the actual knowledge of
the insurer, handled any part of an insurance transaction for which the
other agent was not compensated.
(6) Correspondence, written solicitations or proposals, or other written
communications sent by the insurer to a prospect, applicant, or insured,
or received from him or her by the insurer, excluding printed material in
general use distributed by the insurer, either directly or indirectly through
its life agents.
(7) Correspondence, written proposals, notices, a statement of reasons,
or other written communications, if any, pertaining to the rescission,
termination, or nonrenewal of a policy or contract, or the election of
nonforfeiture values thereunder, sent by an insurer to a policyholder or
contract holder or received from him or her by an insurer.
(8) A copy of a written comparison of benefits, limitations, exclusions,
and costs of existing accident, sickness, or long-term care coverage and
proposed coverage.
(9) A copy of the outline of coverage or disclosure statement required by
law or regulation.
(10) Copies of any correspondence between the policyholder or
prospective policyholder and the agent or insurer.

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 (11) Copies of correspondence between anyone acting on behalf of the
policyholder or prospective policyholder and the agent or insurer.
Except as otherwise provided, the records shall be maintained for a minimum
period of 5 years following the actual delivery of the insurance policy. Or, if no
policy or contract was issued, for a minimum period of 5 years after the date of
the application.

It shall be the obligation of each life, life and disability, and disability insurance
agent and any other agent and insurer to preserve and maintain all applicable
records in his or her possession, in addition to those records transmitted to the
insurer, at his or her principal place of business for a minimum of 5 years. The
records shall be kept in an orderly manner so that the information therein is
readily available, and shall be open to inspection or examination by the
commissioner at all times. (CIC 10508.5)

Records General
Wherever applicable, the following records shall be maintained by every agent or
broker or surplus lines broker or special lines' surplus lines broker with respect to
each and every insurance transaction for at least five years after expiration or
cancellation date of the policy to which the records pertain: (Title 10, CCR 2190)

(a) Name of insured,

(b) Name of insurer,
(c) Policy number,
(d) Effective date, termination date and mid-term cancellation date of
coverage,
(e) Amount of gross premium,
(f) Amount of net premium,
(g) Amount of commission and basis on which computed,
(h) Names of persons who receive, or are promised, any commissions or
other valuable consideration related to the transaction,
(i) Amount of premium received including itemization of any partial
payments or additional premium,
(j) Date premium received by agent or broker,
(k) Date deposited in bank account or bank depository into which
premiums are deposited or maintained in accord with Section 1733 of the
Insurance Code, including but not limited to trustee accounts maintained
pursuant to Section 1734 of the Insurance Code,
(l) Name and address of bank and number of account in which premium is
deposited or maintained in accord with Section 1733 of the Insurance
Code, including but not limited to trustee accounts maintained pursuant to
Section 1734 of the Insurance Code,
(m) Date premium paid by agent or broker to the person entitled thereto
and identification of the means of transmittal,
(n) Amount of net and gross return premium,
(o) Date return premium is received from insurer by agent or broker which
may be the date the credit is taken from the insurer or the date the check

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 or draft is received, and
(p) Date gross return premium is remitted to person entitled thereto by
agent or broker and identification of means of transmittal.

Office Location
All resident property broker-agent and/or casualty broker-agent are required to
maintain an principal office in the State of California in order to transact business.
This address must be specified on all renewal and license applications.

Premium Financing Compensation Disclosures

778.02. (a) Any person engaged in business as an insurance agent or broker
and who participates in the arrangement of a premium financing agreement shall,
if he accepts compensation for arranging, directing, or performing services in
connection with the premium financing agreement, disclose to the insured, in a
manner and form established by the commissioner, the amount of compensation
he is to receive from the premium financer and maintain for three years and
make available to the commissioner a list of accounts in connection with which
he has accepted compensation for premium financing services showing the
amount of such compensation with respect to each premium financing
agreement and with respect to each financing schedule used by the agent or
broker. The requirements of this subdivision shall not apply with respect to
interest paid to the broker or agent by the premium financer based upon delay in
payment
of the premium due the insurer as permitted under subdivision (a) or (b) of
Section 18628 of the Financial Code. (b) The commissoner shall hold a hearing
and adopt by regulation a standard procedure and form for making the disclosure
to the insured required by subdivision (a).

Broker Fees
A broker cannot receive any fee unless based on a written agreement signed by
the party being charged. Broker fees are not subject to a premium tax.

Charges for Extra Services may be permitted for services that are above and
beyond the normal duties of a producer. These extra services may include
additional research activities, or services performed as a convenience to the
insured that result in extra expense to the broker or agent. It is generally
recommended whenever any extra services will be performed that a written
agreement be signed by the insured in advance indicating approval and
acknowledging their responsibility for paying the extra charges.

Insurance Industry Code of Ethics

1) Place the customer’s interest first.

2) Know your job—and continue to increase your level of competence
3) Identify customer needs and recommend products/services that meet
those needs
4) Accurately and truthfully, represent products and services

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 5) Use simple language—talk “laypersons” language – when possible
6) Stay in touch with customers, and conduct periodic coverage reviews
7) Protect your confidential relationship with your client
8) Keep informed of, and obey, all insurance laws and regulations
9) Provide exemplary service to your clients.
10) Avoid unfair or inaccurate remarks about the competition.

Insurance Companies
Insurance is mostly provided privately. In other words, most types of insurance
available are offered by private companies. Companies may be organized in a
variety of different ways, and may be limited as to where and what types of
insurance they are authorized to provide.

As previously mentioned in this chapter, insurance is a business. The four main

business functions of an insurance company are:

1. Actuarial,
2. Sales & Marketing,
3. Underwriting, and
4. Claims handling.

Although an agent operates primarily in the sales & marketing function, he or she
may participate in at least three of the four functions at some point.
An insurance company’s actuarial function is often its least-understood function.
Actuaries—who are certified by professional organizations—take an academic
look at loss histories, laws and financial trends to develop the guidelines, terms
and conditions under which an insurance company will write policies. In some
insurance companies, the actuarial staff is small and doesn’t interact much with
the other functions. You may hear actuaries referred to as “wizards” or “elves”—
since they operate apart from the rest of the company and their decisions are
sometimes confusing to others.

Sales & marketing is usually the most visible part of an insurance company (in
this way, it’s much different than the actuarial function). Sales & marketing is the
company’s “public face.” For most of the insurance industry’s history,
independent agents were the main method of sales and marketing. And, in many
ways, the independent agent remains the classic example of how policies are
marketed and sold. However, in the last few decades, other marketing and sales
channels have grown.

Captive agents—who only sell the policies of one insurance company—have

become a significant alternative to independent agents.

Also, a number of companies have begun using direct marketing as their main
method of selling coverage. Direct marketers don’t use agents or brokers to sell
their insurance; they sell through direct mail and telemarketing. Since they

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eliminate a sales staff—and a commission structure—these companies usually
offer cheaper premium. The problem is: Some of those companies handle claims
the same way they sell policies. In other words, the price break usually comes at
the cost of service.

Underwriting is the application of actuarial guidelines to specific individuals and

companies. It’s the process by which premiums are determined…and insureds
are judged to be preferred, standard, substandard or uninsurable.

Preferred risks are entitled to premium discounts, while substandard risks may
be declined, or they may have to pay an extra premium for the policy or have a
policy issued with a rider omitting some element of the coverage.

Agents play an important role in gathering the information that a company’s

underwriters will use to make these determinations. In some cases, the agent will
also be trusted to make some preliminary underwriting judgments in the field.

Claims handling covers the entire process of evaluating and paying claims
made under policies. This is the part of the insurance company that often draws
the most attention from consumers, politicians and media outlets.

In some cases, the insurance company’s customer service operations will fall
under the supervision of the claims managers.

Reciprocal Company: A reciprocal insurer is an unincorporated company

consisting of subscribers managed by an attorney in fact. The California State
Automobile Association (CSAA) is a reciprocal insurer.

Risk Retention Groups:

Risk Retention Groups are liability insurers owned by their policyholders.
Commonly, the policyholders are involved in the same type of risk and find it cost
effective and practical to establish their own company. For example, Risk
Retention Groups have been formed to offer professional liability coverage to
physicians who also are part owners of the company. In this way, the physicians
can choose to structure the underwriting guidelines to only insure physicians who
are moderate risks, therefore allowing a lower premium for all insured.

An entity seeking to be licensed in this state as a risk retention group shall be

organized under the laws of this state and licensed as a liability insurance
company. [131] Risk retention groups chartered, incorporated, or licensed in
states other than this state and seeking to do business as a risk retention group
in this state shall file a notice of operation with the commissioner of its intention
to do business in this state. The notice shall be filed with e commissioner within
60 days of the filing by the group of any notice filed with its chartering state of its
intention to do business in this state. In no event may a notice of intended
operation be filed with the commissioner less than 60 days prior to the group
commencing business in this state. [132]

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No risk retention group shall be required or permitted to join or contribute
financially to any insurance insolvency guaranty fund, or similar mechanism, in
this state, nor shall any risk retention group, or its insured’s or claimants against
its insured’s, receive any benefit from any such fund for claims arising under the
insurance policies issued by that risk retention group. [133(a)]

No person, firm, association, or corporation shall act or aid in any manner in

soliciting, negotiation, or procuring liability insurance in this state from a risk
retention group unless that person, firm, association, or corporation is licensed as
a property broker-agent and/or casualty broker-agent. The individual or entity is
authorized to act as an insurance broker; except salaried employees or officers
of a risk retention group, provided no part of the compensation of such person is
on a commission basis or otherwise based on production of business. [137(a)]

No person, firm, association, or corporation shall act or aid in any manner in

soliciting, negotiating, or procuring liability insurance from an insurer not
authorized to do business in this state on behalf of a purchasing group in this
state unless that person, firms, association, or corporation is licensed as a
surplus line broker.

A nonresident person may be licensed as a surplus lines broker for purposes of

placing insurance on behalf of a purchasing group. [137(b)]

The McCarren-Ferguson Act (1945)

This law recognized that state regulation of insurance was in the public’s best
interest and thus exempted the insurance industry from the federal regulation
required for most interstate commerce industries. However, it did give the federal
government the right to apply antitrust laws “to the extent that such business
(insurance) is not regulated by the state level.” To avoid federal intervention,
each state has revised its insurance laws to conform to these requirements.

HEALTH INSURANCE PORTABILITY AND ACCOUNTABILITY ACT (HIPAA)

HIPAA was enacted in 1996 and affects almost all healthcare providers.
This law defines that the information in client files belongs to the client and must
be protected. HIPAA has made sweeping changes in the way that medical
information is handled and protected.

HIPAA, in general, is designed to make health coverage more portable for

individuals who change jobs or health plans by limiting the coverage exclusions
that can be imposed when such a change occurs. Employers who provide health
insurance for their employees are required to offer full health care coverage
immediately to newly hired employees if they previously had "creditable"
coverage for 12 straight months with no lapse in coverage of 63 days or more.
If an individual did not have creditable coverage, the new insurer can refuse to
pay for any pre-existing conditions for 12 months. However, the individual may
reduce the exclusion period if he/she had group health plan coverage or health

Insurance Code 57
insurance prior to enrolling in the plan. HIPAA allows an individual to reduce the
exclusion period by the amount of time that he/she had creditable coverage prior
to enrolling in the plan and after any "significant breaks" in coverage. If the
enrollee had creditable coverage for the last eight months, there would only be a
four-month exclusion period. Late enrollees in group health plans might have to
wait up to 18 months for coverage for pre-existing conditions.

When someone leaves a health plan, he/she should get a "certificate of

creditable coverage". The certificate should list the following: coverage dates;
policy ID number; insurer's name and address; and insured's name as well as
any family members included under the coverage. When an entire business
changes health insurance carriers, certificates of creditable coverage are not
necessary as the new health insurance is issued with full take-over benefits for
all eligible members enrolled on the date that the new insurance starts. This
means all pre-existing conditions are covered immediately by the new insurance
policy.

HIPAA's rules apply to every employer group health plan that has at least
two participants that are current employees, including companies that are self-
insured. The law prohibits group health plans and health insurers from
discriminating against individuals with regard to eligibility, premiums, or
contributions based on any health status related factor (e.g. a plan may not require
an individual to pay a premium greater than do similarly situated individuals
enrolled on the basis of any health status related factor). HIPAA's rules provide
no protection if a person switches from one individual health plan to another
individual health

Policy Cancellations / Failure to renew

Definitions (CIC 660)
"Renewal" or "to renew" means to continue coverage with either the insurer
which issued the policy or an affiliated insurer, as defined in Section 1215, for an
additional policy period upon expiration of the current policy period of a policy,
provided that if coverage is continued with an affiliated insurer, it shall be the
same or broader coverage as provided by the present insurer, and the insured
shall be notified in writing at least 20 days prior to expiration of the current policy
period of all of the following:

(1) That the insurer has determined that it will not offer renewal of the policy with
the present insurer,
(2) That it is offering replacement in an affiliated insurer,
(3) That the insured may obtain in writing the reasons for the change in insurers if
he or she requests in writing not later than one month following the expiration of
the policy period the reason or reasons for the change in insurers.

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Any policy with a policy period or term of six months or less, whether or not made
continuous for successive terms upon the payment of additional premiums, shall
for the purpose of this chapter be considered as if written for a policy period or
term of six months.

Any policy written for a term longer than one year, or any policy with no fixed
expiration date, shall for the purpose of this chapter, be considered as if written
for successive policy periods or terms of one year.

"Nonpayment of premium" means failure of the named insured to discharge

when due any of his obligations in connection with the payment of premiums on a
policy, or any installment of such premium, whether the premium is payable
directly to the insurer or its agent or indirectly under any premium finance plan or
extension of credit.

"Cancellation" means termination of coverage by an insurer (other than

termination at the request of the insured) during a policy period.

"Nonrenewal" means a notice by the insurer to the named insured that the
insurer is unwilling to renew a policy.

"Expiration" means termination of coverage by reason of the policy having

reached the end of the term for which it was issued or the end of the period for
which a premium has been paid.

CIC 481.5 (a) Whenever a policy of personal lines insurance terminates

for any reason, or there is a reduction in coverage, the insurer shall tender the
gross unearned premium resulting from the termination, or the amount of the
unearned premium generated by the reduction in coverage, to the insured or,
pursuant to Section 673, to the insured's premium finance company. The gross
unearned premium shall be tendered within 25 business days after the insurer
either receives notice of the event that generated the gross unearned premium,
or receives notice from a premium finance company of a cancellation.

(b) (1) Whenever a policy other than a policy of personal lines insurance
terminates for any reason, or there is a reduction in coverage, the gross
unearned premium shall be tendered to the insured or, pursuant to Section 673,
to the insured's premium finance company. If the policy is not auditable, the
gross unearned premium shall be tendered within 80 business days after the
insurer either receives notice of the event that generated the gross unearned
premium, or receives notice from a premium finance company of a cancellation.
If the policy is auditable, the gross unearned premium shall be tendered within 80
business days after the insured provides all requested audit information to the
insurer or the insurer's designee.
(2) Notwithstanding paragraph (1), an insurer shall not be required to tender
the unearned premium within 80 business days if the final unearned premium

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amount cannot be determined due to the insured's failure, in breach of a policy
requirement, to cooperate with the insurer in a premium audit, or if the amount of
the unearned premium determined by a premium audit remains in dispute.

(c) An insurer may tender gross or net unearned premium to an agent or broker,
or net unearned premium to a finance company, but shall remain liable to the
insured or finance company for payment of any portion of the gross unearned
premium that the agent or broker fails to remit to the insured or premium finance
company.

(d) Any unearned premium that an insurer fails to tender within the time periods
specified in subdivisions (a) and (b) shall bear interest at the rate of 10 percent
per annum from and after the date on which the unearned premium was required
to be tendered. For the purposes of this section, the tender of any unearned
premium to the insured or premium finance company shall be deemed complete
upon the deposit of the unearned premium in the United States mail,
prepaid,addressed to the named insured or premium finance company at the last
known address, or to an agent or broker with an assignment pursuant to
paragraph (1) of subdivision (g).

Prohibited cancellations: CIC 670. No admitted insurer may cancel or refuse

to renew motor vehicle liability insurance policy covering drivers hired by a
commercial business establishment merely because those drivers have been
convicted of violations of the Vehicle Code or the traffic laws of any subdivision of
the state while driving their personal cars.

No lender may exercise the right to cancel a financed insurance policy because
of the default of the insured under a premium loan agreement (impound account)
until the lender has given the insured a 10-day notice of cancellation.
A policy of liability insurance issued to a local public entity or state agency as a
named insured may not be cancelled or have renewal declined for reasons other
than nonpayment of premium, unless notice is mailed to the named insured at
least 45 days prior to the effective date of non-renewal. Notice must be mailed at
least 60 days prior to the effective date for any cancellation other than non-
payment. This notice doesn’t need to be sent if a renewal notice stating the
premium for an additional period of coverage has been sent to the named
insured at least 45 days before cancellation or expiration of an existing policy,
and this premium has not been processed by the insurer before such
cancellation or expiration.

Cancellation for personal lines covering real, personal property, and liability
other than auto, cancellation after a policy has been in force for 60 days or if it is
a renewal, no notice of cancellation is effective unless based on:
1. Non-payment of premium 10-day notice
2. Conviction of the named insured of a crime that increases any hazard
insured against

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 3. Discovery of fraud or misrepresentation either by the insured in obtaining
the insurance, or in pursuing a claim under the policy
4. Discovery of grossly negligent acts or omissions by the insured which
substantially increases the hazards insured against
5. Physical changes in the property which result in it becoming uninsurable
Commercial insurance policies, excluding auto, ocean marine, surplus lines,
reinsurance, government programs, workers compensation or disability
insurance, the following applies to cancellation of commercial insurance policies.
Grounds for cancellation of commercial insurance other than the exclusions
named above, after a policy has been in effect for 60 days, no notice of
cancellation shall be effective unless it is based on:
1. Nonpayment of premium – 10 days
2. A court judgment that the insured has violated a law and as a result
increased the risk
3. Discovery of fraud or material misrepresentation
4. Willful or grossly negligent acts or omissions
5. Failure to implement reasonable loss control requirements agreed to as a
condition of policy issuance
6. Commissioner’s determination that the insurer’s financial integrity is
threatened
7. Changes in the property or activities on the property result in an increase
in risk
Any increase in premium, reduction in limits, change in conditions of coverage
must be accompanied by a notice at least 30 days before the change and must
be based on:
1. Discovery of willful or grossly negligent acts or omissions
2. Failure to implement reasonable loss control requirements agreed to
3. Insurer’s financial integrity is threatened
4. Material increase in risk
Notice of cancellation for commercial umbrellas, or excess property or
liability coverage, after the policy has been in force for 60 days or if it is a
renewal, may be canceled for:
1. Material change in limits, type or scope of coverage, or exclusions in one
or more of the underlying policies
2. Cancellation or nonrenewal of one or more of the underlying policies
3. A reduction in financial rating or grade of one or more insurers insuring the
underlying policies
Notice of Cancellation. A notice of cancellation shall:
1. Be in writing
2. Be delivered to the producer of record and the named insured
3. State which grounds set forth is relied upon for cancellation
4. State that the insured has the right upon written request mailed to the
insurer within 15 days of date of cancellation to have the insurer specify
the reason for cancellation

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 5. Include the effective date of cancellation and reasons for cancellation
6. Be given at least 30 days prior to effective date of cancellation (10 days
for nonpayment of premium or fraud) (CIC 677; 677.2)

OTHER CANCELLATIONS
Family Day Care : The arbitrary cancellation of a homeowners insurance policy
based solely on the insured having a license to operate a family home daycare
at the insured location will subject the insurer to administrative sanctions, unless:
(CIC 676.1)
1. There has been a material misrepresentation of fact;
2. The risk has been changed substantially since the policy was issued;
3. There has been nonpayment of premium; or
4. The insurer no longer writes homeowners policies.
Foster Home Business : Insurers may not fail to accept an application, refuse to
issue, cancel or non-renew a homeowners or tenant’s policy because the policy
holder is engaged in licensed foster home activities to a licensed foster family
home or small family home. (CIC 676.6)
Malpractice Insurance : Limitations and/or exclusions on professional liability
policies may be imposed if recommended by a qualified underwriting committee
advising the insurer. A 30 day notice is required. (CIC 676.3)

Health Care Facilities : Premium changes for health care facilities may be
imposed if recommended by a qualified professional liability advisory committee
advising the insurer with a 30 day notice. (CIC 676.4)

Policy Terms : A policy with no fixed expiration, or with a term of less than one
year, shall be considered to be a policy for a term of one year, and a policy
written for a term of more than one year shall be considered as if written for
successive terms of one year. (CIC 676.5)

Non-renewal - Personal lines: Notice at least 45 days prior to expiration must

be delivered or mailed to the named insured at the address listed in the policy,
with one of the following:
1. An offer to renew pending payment of premium, any reduction of limits or
coverage elimination must be stated.
2. A notice of nonrenewal along with a statement that upon written request by
the named insured, within 20 days the insurer will provide a written
explanation for nonrenewal
3. In the event the insurer fails to complete either items #1 or #2 listed above,
the existing policy must remain in effect for 45 days from the date that either
the offer to renew or the reasons for nonrenewal is delivered or mailed to the
insured (CIC 678)

Non-renewal - Commercial lines: Notice at least 60 days, but not more than
120 days prior to the end of the policy period, along with reasons for nonrenewal.

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Failure by the insurer to meet the specified time period the existing policy will
remain in effect for an additional 60 days.

No notice is required with any of the following:

1. The policy has been extended for 90 days or less
2. The insured has obtained replacement coverage.
3. The insurance has been renewed or transferred without changes.
4. The insured requests a change in terms, conditions or risks within 60 days
prior to the end of the policy period
5. The insurer has made a written offer to renew the policy under different
terms, conditions or rates. (CIC 678.1)

No policy may be canceled or nonrenewed due to corrosive soil conditions if the

policy contains an existing exclusion of payment of loss for that period
(CIC 678.5)

Immunity from Liability: There shall be no liability on the part of, and no cause
of action of any nature shall arise against, any insurer or its authorized
representatives, agents, or employees, or any licensed insurance agent or
broker, for any statement made, unless shown to have been made in bad faith
with malice in fact, by any of them in (a) any written notice of cancellation or in
any other oral or written communication specifying the reasons for cancellation,
(b) any communication providing information pertaining to such cancellation, or
(c) evidence submitted at any court proceeding or informal inquiry in which such
cancellation is an issue. (CIC 679)

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